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2011-20337

  • Federal Register, Volume 76 Issue 154 (Wednesday, August 10, 2011)[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]

    [Rules and Regulations]

    [Pages 49291-49300]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2011-20337]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 35

    RIN 3038-AD21

    Agricultural Swaps

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

    ``CFTC'') is charged with proposing rules to implement new statutory

    provisions enacted by Title VII of the Dodd-Frank Wall Street Reform

    and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act

    provides that swaps in an agricultural commodity (as defined by the

    Commission) are prohibited unless entered into pursuant to a rule,

    regulation or order of the Commission adopted pursuant to certain

    provisions of the Commodity Exchange Act (``CEA'' or ``Act''). On

    February 3, 2011, the Commission requested comment on a set of proposed

    rules that would, among other things, implement regulations whereby

    swaps in agricultural commodities may transact subject to the same

    rules as all other swaps. The proposed rules for swaps in an

    agricultural commodity would repeal and replace the Commission's

    current regulations concerning the exemption of swap agreements. After

    reviewing the comments submitted in response to the proposed rules, the

    Commission has determined to issue these final rules for swaps in an

    agricultural commodity in the form as originally proposed. The February

    3, 2011, proposed rules also included provisions that would

    substantially amend the Commission's regulations regarding commodity

    option transactions. However, in this final rule the Commission is only

    issuing the rules for swaps in an agricultural commodity. The proposed

    rules for commodity option transactions will be addressed at a later

    date.

    DATES: Effective Date--December 31, 2011.

    FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

    Counsel, (202) 418-5041, dheitman@cftc.gov, or Ryne Miller, Attorney

    Advisor, (202) 418-5921, rmiller@cftc.gov, Division of Market

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    A. Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street

    Reform and Consumer Protection Act.\1\ Title VII of the Dodd-Frank Act

    \2\ amended the CEA \3\ to establish a comprehensive new regulatory

    framework for swaps and security-based swaps. The legislation was

    enacted to reduce risk, increase transparency, and promote market

    integrity within the financial system by, among other things: (1)

    Providing for the registration and comprehensive regulation of swap

    dealers and major swap participants; (2) imposing clearing and trade

    execution requirements on standardized derivative products; (3)

    creating robust recordkeeping and real-time reporting regimes; and (4)

    enhancing the Commission's rulemaking and enforcement authorities with

    respect to, among others, all registered entities and intermediaries

    subject to the Commission's oversight.

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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the

    Dodd-Frank Act may be accessed at http://www.cftc.gov./

    LawRegulation/OTCDERIVATIVES/index.htm.

    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

    be cited as the ``Wall Street Transparency and Accountability Act of

    2010.''

    \3\ 7 U.S.C. 1 et seq.

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    B. Proposed Agricultural Swaps Rules

    Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an

    agricultural commodity (as defined by the Commission) \4\ are

    prohibited unless entered into pursuant to a rule, regulation or order

    of the Commission adopted pursuant to CEA section 4(c).

    [[Page 49292]]

    Further, section 733 of the Dodd-Frank Act, new CEA section 5h(b)(2),

    provides that a swap execution facility (``SEF'') may not list for

    trading or confirm the execution of any swap in an agricultural

    commodity (as defined by the Commission) except pursuant to a rule or

    regulation of the Commission allowing the swap under such terms and

    conditions as the Commission shall prescribe.

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    \4\ As discussed below, in accordance with the mandate of the

    Dodd-Frank Act, the Commission recently promulgated a final rule

    defining the term ``agricultural commodity.'' See 76 FR 41048, July

    13, 2011.

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    As a result of the Dodd-Frank changes, on February 3, 2011, the

    Commission published in the Federal Register a notice of proposed

    rulemaking to withdraw current part 35 of the Commission's regulations

    \5\ and replace it with a new part 35 that would essentially permit the

    transaction of swaps in an agricultural commodity (or, ``agricultural

    swaps'') \6\ subject to the same rules and regulations applicable to

    any other swap (the ``NPRM'').\7\ The NPRM was preceded by an advanced

    notice of proposed rulemaking wherein the Commission sought general

    comment on the agricultural swaps provisions in the Dodd-Frank Act (the

    ``ANPRM'').\8\ The NPRM included an overview and summary of the

    comments received on the ANPRM, which generally favored treating

    agricultural swaps the same as every other swap.

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    \5\ 17 CFR part 35.

    \6\ When this notice refers to ``agricultural swaps,'' it is

    referring to swaps in an agricultural commodity, as identified in

    section 723(c)(3) of the Dodd-Frank Act.

    \7\ See Commodity Options and Agricultural Swaps, 76 FR 6095,

    February 3, 2011.

    \8\ See Agricultural Swaps, 75 FR 59666, Sept. 28, 2010.

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    C. Proposed Commodity Options Rules

    Because the Dodd-Frank Act statutory definition of a swap includes

    commodity options (other than options on futures),\9\ the NPRM also

    included proposed provisions that would substantially amend the

    Commission's regulations regarding commodity option transactions. At

    this time, the Commission is only finalizing the rules for agricultural

    swaps in amended part 35 of the Commission's regulations. The proposed

    rules for commodity options--including proposed amendments to parts 3,

    32, and 33--will be addressed at a later date.

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    \9\ Section 721 of the Dodd-Frank Act adds new section 1a(47) to

    the CEA, defining ``swap'' to include not only ``any agreement,

    contract, or transaction commonly known as,'' among other things,

    ``an agricultural swap'' or ``a commodity swap,'' but also ``[an]

    option of any kind that is for the purchase or sale, or based on the

    value, of * * * commodities * * *.'' However, the NPRM notes that

    the new swap definition did not include options on futures, options

    on any security, certificate of deposit, or group or index of

    securities, including any interest therein or based on the value

    thereof, that is subject to the Securities Act of 1933 and the

    Securities Exchange Act of 1934 (see new CEA section

    1a(47)(B)(iii)), and foreign currency options entered into on a

    national securities exchange registered pursuant to section 6(a) of

    the Securities Exchange Act of 1934 (see new CEA section

    1a(47)(B)(iv)).

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    D. Final Agricultural Swaps Rules

    Accordingly, the preamble to this final rule reviews the statutory

    and regulatory framework governing agricultural swaps, as discussed in

    the NPRM,\10\ provides an overview and summary of the comments received

    on the agricultural swaps rules proposed in the NPRM, and includes an

    explanation of the final rules issued herein. This preamble also

    includes a discussion of CEA section 4(c), the primary statutory

    authority for the agricultural swaps rules,\11\ and a detailed

    discussion of the costs and benefits of the final rule, along with a

    review of those comments specifically addressing the costs and benefits

    of the proposed agricultural swaps rules.

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    \10\ See NPRM, 76 FR at 6096 at 6096-97, Feb. 3, 2011.

    \11\ In addition to 4(c), these final rules are also being

    adopted pursuant to the Commission's authority under CEA section

    4c(b)--just as original part 35 was adopted pursuant to both CEA

    section 4(c) and 4c(b).

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    II. Agricultural Swaps Background

    A. Pre Dodd-Frank Swaps Provisions

    As explained in the NPRM, beginning in 2000, bilateral swaps

    between certain sophisticated counterparties were generally exempted

    from the Commission's jurisdiction pursuant to pre Dodd-Frank CEA

    section 2(g),\12\ which was added to the CEA by the Commodity Futures

    Modernization Act of 2000 (``CFMA'').\13\ However, pre Dodd-Frank

    section 2(g) specifically excluded an ``agreement, contract, or

    transaction'' in an ``agricultural commodity'' from the CFMA swaps

    exemption.\14\ While the term ``agricultural commodity'' is not

    specifically defined in the Act, the Commission recently adopted a

    final rule defining ``agricultural commodity.'' \15\

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    \12\ Pre Dodd-Frank section 2(g) provided:

    No provision of this Act (other than section 5a (to the extent

    provided in section 5a(g)), 5b, 5d, or 12(e)(2)) shall apply to or

    govern any agreement, contract, or transaction in a commodity other

    than an agricultural commodity if the agreement, contract, or

    transaction is--

    (1) Entered into only between persons that are eligible contract

    participants at the time they enter into the agreement, contract, or

    transaction;

    (2) subject to individual negotiation by the parties; and

    (3) not executed or traded on a trading facility.

    Pre Dodd-Frank CEA section 2(g). Note that section 2(g) is among

    those sections of the CEA that were repealed by the Dodd-Frank Act,

    effective July 16, 2011.

    \13\ Pre Dodd-Frank CEA section 2(g) was added to the CEA as

    section 105(b) of the CFMA, enacted as Appendix E to Public Law 106-

    554.

    \14\ Notably, pre Dodd-Frank CEA section 2(g) is not the only

    statutory provision added by the CFMA that excluded or exempted

    bilateral swaps between eligible contract participants from the

    Commission's jurisdiction. Pre Dodd-Frank CEA section 2(d)(1)

    excluded any such bilateral ``agreement, contract, or transaction''

    in excluded commodities from Commission jurisdiction, while pre

    Dodd-Frank CEA section 2(h)(1) created a similar exemption for a

    ``contract, agreement or transaction'' in exempt commodities. Both

    sections 2(d)(1) and 2(h)(1) were also among the CEA provisions

    repealed by the Dodd-Frank Act, effective July 16, 2011.

    \15\ See Agricultural Commodity Definition, 76 FR 41048, July

    13, 2011.

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    The effect of the pre Dodd-Frank CEA sections explicitly excluding

    agricultural commodities from the CFMA statutory swaps exemptions and

    exclusions was that swaps involving exempt and excluded commodities

    were allowed to transact largely outside of the Commission's

    jurisdiction or oversight, while swaps in agricultural commodities had

    to continue to rely on authority found in pre-CFMA law. As discussed in

    greater detail below, that pre-CFMA authority was found in part 35 of

    the Commission's regulations.

    Part 35 originally provided a broad exemption for certain swap

    agreements and applied to swaps in all commodities.\16\ After the CFMA

    amendments to the CEA, which statutorily exempted swaps on ``exempt''

    and ``excluded'' commodities from virtually all of the Commission's

    jurisdiction, part 35 remained relevant only for agricultural swaps.

    With the exception of three outstanding exemptive orders related to

    cleared agricultural basis and calendar swaps \17\

    [[Page 49293]]

    (which orders exempt certain swaps transactions from part 35's non-

    fungibility and counterparty creditworthiness requirements), part 35 is

    the sole existing authority under which market participants may

    transact agricultural swaps that are not options.\18\

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    \16\ Part 35 provides eligible swap participants (as defined in

    Sec. 35.1(b)(2)) with a general exemption from the CEA for a swap

    that is not part of a fungible class of agreements that are

    standardized as to their material economic terms, where the

    creditworthiness of each counterparty is a material consideration in

    entering into or determining the terms of the swap, and the swap is

    not entered into and traded on or through a multilateral transaction

    execution facility. See Sec. 35.2.

    \17\ Part 35, at Sec. 35.2(d), also provides that ``any person

    may apply to the Commission for exemption from any of the provisions

    of the Act (except 2(a)(1)(B) [liability of principal for act of

    agent]) for other arrangements or facilities, on such terms and

    conditions as the Commission deems appropriate, including but not

    limited to, the applicability of other regulatory regimes.'' See 17

    CFR 35.2(d). The Commission has granted three such exemptions, which

    have in each instance been styled as exemptive orders pursuant to

    CEA section 4(c). See

    1. Order (1) Pursuant to Section 4(c) of the Commodity Exchange

    Act (a) Permitting Eligible Swap Participants To Submit for Clearing

    and ICE Clear U.S., Inc. and Futures Commission Merchants To Clear

    Certain Over-The-Counter Agricultural Swaps and (b) Determining

    Certain Floor Brokers and Traders To Be Eligible Swap Participants;

    and (2) Pursuant to Section 4d of the Commodity Exchange Act,

    Permitting Certain Customer Positions in the Foregoing Swaps and

    Associated Property To Be Commingled With Other Property Held in

    Segregated Accounts, 73 FR 77015, Dec. 18, 2008;

    2. Order (1) Pursuant to Section 4(c) of the Commodity Exchange

    Act, Permitting the Chicago Mercantile Exchange to Clear Certain

    Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d

    of the Commodity Exchange Act, Permitting Customer Positions in Such

    Cleared-Only Contracts and Associated Funds To Be Commingled With

    Other Positions and Funds Held in Customer Segregated Accounts, 74

    FR 12316, Mar. 24, 2009; and

    3. Order (1) Pursuant to Section 4(c) of the Commodity Exchange

    Act, Permitting the Kansas City Board of Trade Clearing Corporation

    To Clear Over-the-Counter Wheat Calendar Swaps and (2) Pursuant to

    Section 4d of the Commodity Exchange Act, Permitting Customer

    Positions in Such Cleared-Only Swaps and Associated Funds To Be

    Commingled With Other Positions and Funds Held in Customer

    Segregated Accounts, 75 FR 34983, June 21, 2010.

    \18\ Issues related to options on agricultural commodities were

    reviewed in detail in the NPRM, 76 FR 6095 at 6097-98, Feb. 3, 2011.

    As noted above, final rules regarding the post Dodd-Frank treatment

    of commodity options will be addressed by the Commission at a later

    date.

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    B. Dodd-Frank Swaps Provisions

    i. Non-Agricultural Swaps

    As explained in the introduction, the Dodd-Frank Act amended the

    CEA to remove the CFMA swaps exemptions and exclusions and to create a

    new regulatory regime for swaps. Under the CEA, as amended by the Dodd-

    Frank Act, only eligible contract participants (``ECPs'') \19\ may

    enter into a swap, unless such swap is entered into on a designated

    contract market (``DCM''),\20\ in which case any person may enter into

    the swap.\21\

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    \19\ ``Eligible contract participant'' is defined in CEA section

    1a(18). A proposal to further define the term is also currently

    pending. See Further Definition of ``Swap Dealer,'' ``Security-Based

    Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based

    Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

    80174, Dec. 21, 2010 (joint rulemaking with Securities and Exchange

    Commission (``SEC''). The comment period closed February 22, 2011.

    \20\ A designated contract market is a board of trade designated

    as a contract market under CEA section 5.

    \21\ See new CEA section 2(e) as added by section 723(a)(2) of

    the Dodd-Frank Act.

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    New CEA section 2(h), as added by section 723(a)(3) of the Dodd-

    Frank Act, establishes a clearing requirement for swaps. Under that

    subsection, the Commission would determine, based on factors listed in

    the statute, whether a swap, or a group, category, type, or class of

    swaps, should be required to be cleared. A swap that is required to be

    cleared must be executed on a DCM or a SEF,\22\ if a DCM or SEF makes

    the swap available for trading. Swaps that are not required to be

    cleared may be executed bilaterally.

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    \22\ The requirements for SEFs are set forth in new CEA section

    5h.

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    Section 731 of the Dodd-Frank Act adds a new section 4s to the CEA

    that provides for the registration and regulation of swap dealers and

    major swap participants.\23\ The new requirements for swap dealers and

    major swap participants include, in part, capital and margin

    requirements, business conduct standards, and reporting, recordkeeping,

    and documentation requirements.

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    \23\ ``Swap dealer'' is defined in new CEA section 1a(49), as

    added by section 721(a)(21) of the Dodd-Frank Act. ``Major swap

    participant'' is defined in new CEA section 1a(33), as added by

    section 721(a)(16) of the Dodd-Frank Act.

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    Section 737 of the Dodd-Frank Act amends current CEA section 4a

    regarding position limits. Under the Dodd-Frank provisions and amended

    CEA section 4a, the Commission is directed to establish position limits

    as appropriate for futures and options traded on or subject to the

    rules of a designated contract market, and swaps that are economically

    equivalent to such futures and exchange-traded options for both exempt

    and agricultural commodities.

    ii. Agricultural Swaps

    Notwithstanding the new swaps regime in the Dodd-Frank Act, section

    723(c)(3) of Dodd-Frank prohibits swaps in an ``agricultural

    commodity'' (as defined by the Commission) \24\ unless the swap is

    entered into pursuant to an exemption granted under CEA section 4(c).

    The requirements of section 4(c) are discussed in greater detail,

    below.\25\

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    \24\ See the recently adopted definition of agricultural

    commodity at 76 FR 41048, July 13, 2011.

    \25\ Generally speaking, section 4(c) provides that, in order to

    grant an exemption, the Commission must determine that: (1) The

    exemption would be consistent with the public interest and the

    purposes of the CEA; (2) any agreement, contract, or transaction

    affected by the exemption would be entered into by ``appropriate

    persons'' as defined in section 4(c); and (3) any agreement,

    contract, or transaction affected by the exemption would not have a

    material adverse effect on the ability of the Commission or any

    contract market to discharge its regulatory or self-regulatory

    duties under the CEA.

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    Dodd-Frank section 723(c)(3)(B) includes a ``grandfather'' clause

    providing that any rule, regulation, or order regarding agricultural

    swaps that was issued pursuant to the Commission's section 4(c)

    exemptive authority, and that was in effect on the date of enactment of

    the Dodd-Frank Act, would continue to be permitted under such terms and

    conditions as the Commission may prescribe. Such rules, regulations or

    orders include part 35 with respect to agricultural swaps and the

    agricultural basis and calendar swaps noted above.

    In addition to the provisions in section 723(c)(3), section 733 of

    the Dodd-Frank Act, new CEA section 5h(b), provides that a SEF may not

    list for trading or confirm the execution of any swap in an

    agricultural commodity (as defined by the Commission) except pursuant

    to a rule or regulation of the Commission allowing the swap under such

    terms and conditions as the Commission shall prescribe.

    III. Agricultural Swaps Proposal in the NPRM

    The NPRM proposed repealing existing part 35 in its entirety and

    replacing it with the following:

    PART 35--SWAPS IN AN AGRICULTURAL COMMODITY (AGRICULTURAL SWAPS)

    Sec. 35.1 Agricultural swaps, generally.

    (a) Any person or group of persons may offer to enter into, enter

    into, confirm the execution of, maintain a position in, or otherwise

    conduct activity related to, any transaction in interstate commerce

    that is a swap in an agricultural commodity subject to all provisions

    of the Act, including any Commission rule, regulation, or order

    thereunder, otherwise applicable to any other swap; and

    (b) In addition to paragraph (a) of this section, any transaction

    in interstate commerce that is a swap in an agricultural commodity may

    be transacted on a swap execution facility, designated contract market,

    or otherwise in accordance with all provisions of the Act, including

    any Commission rule, regulation, or order thereunder, applicable to any

    other swap eligible to be transacted on a swap execution facility,

    designated contract market, or otherwise.

    In the NPRM, the Commission requested specific input on the following

    questions related to the agricultural swaps proposal:

    1. Generally, would the proposed rulemaking provide an appropriate

    regulatory framework for the transacting of agricultural swaps?

    2. Does the proposal for new part 35 appropriately address all

    outstanding issues as they relate to the transaction of swaps in an

    agricultural commodity?

    3. By limiting participation in agricultural swaps that are

    transacted outside of a DCM to persons that meet the CEA definition of

    an eligible

    [[Page 49294]]

    contract participant and permitting non-ECPs to enter into a swap on a

    DCM, has the proposed rulemaking satisfied the requirements of CEA

    section 4(c)(3), which requires that any agreements, contracts or

    transactions exempted under this provision should be limited to those

    ``entered into solely between appropriate persons?''

    4. Do the proposals omit or fail to appropriately consider any

    other areas of concern regarding agricultural swaps?

    IV. Summary of Comments

    A. General Overview

    Thirty-one formal comment letters substantively addressed the

    NPRM,\26\ representing a broad range of interests, including

    agricultural producers, merchants, swap dealers, commodity funds,

    futures industry organizations, academics/think tanks, a US government

    agency, and private individuals. The comments addressing the

    agricultural swaps proposal came from Gavilon Group, LLC (``Gavilon''),

    a feed manufacturer; the Agricultural Commodity Swaps Working Group (a/

    k/a ``Commodity Options and Agricultural Swaps Working Group''), which

    is comprised of financial institutions, including Barclays Capital,

    Citigroup, Credit Suisse Securities (USA) LLC, JPMorgan Chase & Co.,

    Morgan Stanley, and Wells Fargo & Company, that provide risk management

    and investment products to agricultural end-users; Chris Barnard, an

    individual; Dairy Farmers of America (``DFA''); the Independent Bakers

    Association, which represents over 200 small to medium sized, mostly

    family owned wholesale bakeries and allied industry trades; NextEra

    Energy Resources, LLC, owners of electricity generation assets; CME

    Group, Inc. (``CME''); Futures Industry Association and International

    Swaps and Derivatives Association (``FIA & ISDA''); National Grain and

    Feed Association (``NGFA''); Professor Michael Greenberger, University

    of Maryland School of Law, referencing his comment letter submitted for

    the agricultural commodity definition notice of proposed rulemaking;

    National Council of Farmer Cooperatives (``NCFC''); Commodity Markets

    Council (``CMC''), a trade association made up of U.S. futures

    exchanges and commercial end-users of futures and derivatives markets;

    and National Milk Producers Federation (``NMPF''). In addition, the

    NPRM received several comments that only addressed options,\27\ and

    several comments requesting exemptive relief for the transition period

    following the effective date of the Dodd-Frank Act.\28\

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    \26\ The public comment file for the NPRM is available at:

    http://comments.cftc.gov/PublicComments/CommentList.aspx?id=968.

    This summary references each of the comments that substantively

    addressed the NPRM, whether submitted in response to the original

    NPRM or in response to the re-opened comment period. See Reopening

    and Extension of Comment Periods for Rulemakings Implementing the

    Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR

    25274, May 4, 2011 (this is the Commission's Federal Register

    release that extended the comment deadline for multiple Dodd-Frank

    rulemakings to June 3, 2011). Only those comments submitted in

    response to 76 FR 25274 that specifically addressed the agricultural

    swaps proposal are included in this summary. In addition, the

    comment file for the NPRM also included multiple comments that did

    not directly address the Commodity Options and Agricultural Swaps

    NPRM (for example, see the comments from Majed El Zein, B.J.

    D'Milli, Maryknoll Office for Global Concerns, Maryknoll Fathers and

    Brothers, J.C. Hoyt, and Jon Pike). Of these, several addressed

    other proposed Commission rulemakings, and those comments are being

    considered in conjunction with the other rulemakings.

    \27\ See, e.g., comments from The Financial Services Roundtable,

    which represents 100 of the largest integrated financial services

    companies in the United States; Edison Electric Institute and

    Electric Power Supply Association; Federal Energy Regulatory

    Commission; American Public Gas Association (``APGA''), which

    represents publicly-owned natural gas distribution systems; Air

    Transport Association of America (``ATA''); Amcot, an association of

    U.S. cotton marketing cooperatives; Coalition of Physical Energy

    Companies, an association of businesses that produce, process, and

    merchandize energy commodities at retail and wholesale levels;

    National Rural Electric Cooperative Association, American Public

    Power Association, and Large Public Power Council, all representing

    U.S. not-for-profit consumer-owned electric utilities in a joint

    letter; Working Group of Commercial Energy Firms, a group of

    unspecified firms which indicated that their primary business is the

    physical delivery of energy commodities to industrial, commercial

    and residential consumers; and Hess Corporation.

    \28\ See, e.g., comments filed on the Commission's Federal

    register release that re-opened the comment period (76 FR 25274, May

    4, 2011) from the Commodity Options and Agricultural Swaps Working

    Group; INTL FCStone Inc.; NEW Cooperative Inc.; NGFA; NCFC; and

    Innovative Ag Services Co.

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    B. Comments on the Agricultural Swaps Proposal

    Just as with the comments received on the ANPRM, the vast majority

    of commenters who expressed an opinion on the topic supported treating

    agricultural swaps under the same regulatory scheme as other categories

    of swaps, as the Commission proposed. The following statements are

    representative of this sentiment:

    The use of agricultural swaps has been constrained relative to

    other swaps by virtue of being subject to CFTC regulatory

    requirements, while other swaps have been exempted from CFTC

    oversight. As the Commission's proposed rule notes, the passage of

    the Dodd-Frank Act changes the regulatory structure for all swaps

    and institutes a number of safeguards, including the limitation that

    only eligible contract participants (ECPs) may engage in swaps

    unless entered into on a designated contract market; mandatory

    clearing requirements for swaps; and registration, reporting,

    business standards, and capital and margining requirements for swap

    dealers and major swap participants. The NGFA believes that these

    safeguards provide more-than-ample protection in the swaps

    marketplace for both agricultural and non-agricultural swaps and

    that there is no compelling reason to place additional burdens on

    agricultural swaps.'' NGFA letter at 2.

    In our view, applying a single, uniform set of rules to all

    swaps will advance the public interests that Dodd-Frank and the CEA

    are designed to promote and benefit the users of these products.''

    CME letter at 1.

    We are pleased that, if enacted, the [NPRM] would revise

    existing CFTC regulations in order to treat agricultural commodity

    swaps as ``swaps,'' subjecting them to the same regulatory regime as

    all other commodity swap transactions under Dodd-Frank.'' FIA & ISDA

    letter at 2.

    NCFC believes the changes and amendments in the proposed rule

    will provide an appropriate regulatory framework for the transacting

    of agricultural swaps. NCFC letter at 1.

    Similar sentiments were expressed by Gavilon, Amcot, CMC, the Commodity

    Options and Agricultural Swaps Working Group, and Barnard.

    One comment, from the National Milk Producers Foundation (NMPF),

    suggested that the Commission use its CEA section 4(c) authority to

    provide a broad-based exemption exclusively tailored for agricultural

    swaps transactions by certain agricultural end-users to transact

    outside of much of the Dodd-Frank swaps regime. The Commission believes

    that the logical place to address end-user concerns, such as those

    raised by the NMPF comment, is in the participant definitions and the

    end-user rules, which are yet to be finalized. The NMPF comment letter

    has been included in the record for those rulemakings. Addressing the

    concerns of end-users generally, rather than creating special rules for

    agricultural end-users, is consistent with the Commission's proposed

    approach to treat agricultural swaps the same as all other swaps.

    C. Comments Regarding Whether the Agricultural Swaps Proposal Satisfies

    the CEA Section 4(c) Requirements

    Commenters generally expressed the opinion that the proposal to

    allow agricultural swaps to be treated the same as other commodity

    swaps meets the requirements of Section 4(c)(2) of the CEA.\29\ CME

    noted the robust

    [[Page 49295]]

    regulatory regime introduced for the trading of all swaps under the

    Dodd-Frank Act and stated that ``permitting agricultural swaps to

    transact under the same terms and conditions as other swaps will

    provide greater certainty and stability to the agricultural swaps

    market and will advance many of Dodd-Frank's goals, including increased

    pre-trade price transparency, and the reduction of systemic risk

    through the use of central counterparty clearinghouses.'' Commenters

    also believed that the proposal would satisfy the Section 4(c)(2)

    requirement that transactions subject to this exemption would only be

    entered into by appropriate persons. In this regard, CME noted that

    ``Under Dodd-Frank, only market participants that qualify as eligible

    contract participants (`ECPs') may trade swaps in the OTC market. All

    other market participants must trade swaps on, or subject to the rules

    of, a DCM, where they will have the full protections that all DCM users

    enjoy * * * these provisions should limit participation in agricultural

    swaps to appropriate persons.'' Similar sentiments were expressed by

    Gavilon, FIA & ISDA, NCFC, and the Commodity Options and Agricultural

    Swaps Working Group.

    ---------------------------------------------------------------------------

    \29\ CEA section 4(c)(2) requires the CFTC to determine, prior

    to granting a 4(c) exemption, that (1) Such exemption is consistent

    with the public interest and purposes of the CEA, and (2) the

    exempted agreement, contract, or transaction will be entered into

    solely by appropriate persons and will not have a material adverse

    effect on the ability of the Commission or a contract market to

    discharge its regulatory or self-regulatory duties under the CEA.

    ---------------------------------------------------------------------------

    One commenter (Professor Greenberger) was generally opposed to the

    trading of agricultural swaps under the same conditions as other

    physical commodity swaps. This commenter expressed the belief that

    speculative investment in agricultural derivatives ``is

    incontrovertibly a main driving force of rising commodity prices and

    price volatility,'' and that such price instability harms agricultural

    producers. He believes that Congress specifically intended for the CFTC

    to provide special protections to agricultural producers in trading

    swaps and that the rulemaking runs counter to Congress' intent by

    providing for equal treatment of agricultural swaps and all other

    commodity swaps. However, Professor Greenberger did not offer an

    alternative approach, and the Commission does not find further

    reasoning to support treating agricultural swaps in a manner different

    than any other swap.

    D. Comments on the Treatment of Commodity Options

    As noted above, the options issues raised in the NPRM received

    multiple substantive comments, which will be addressed by the

    Commission at a later date.

    E. Issues Outside the Scope of the Proposed Rulemaking

    Although recognizing that their comments were outside the scope of

    the subject rulemaking, several commenters requested that the

    Commission provide clarity regarding the treatment of certain types of

    swap participants and transactions within the overall regulatory scheme

    for swaps. In this regard, several commenters requested that the

    Commission clarify that agricultural producer cooperatives that enter

    into swaps with their own members or third parties in the course of

    marketing their members' agricultural products should be considered to

    be end-users for purposes of the Dodd-Frank clearing exception, and

    further that the Commission should clarify that producer cooperatives

    are excluded from the definitions of swap dealer and major swap

    participant (see, for example, comments from NGFA, NCFC, and DFA). The

    Commission has issued proposed rules regarding: (1) The end-user

    exception to mandatory clearing of swaps pursuant to Sec. 723 of the

    Dodd-Frank Act; \30\ and (2) further definition of certain terms

    regarding market participants, including the terms ``swap dealer'' and

    ``major swap participant,'' pursuant to Sec. 712(d) of the Dodd-Frank

    Act.\31\ Accordingly, the Commission is considering those comments in

    the context of drafting the end-user exception and the participant

    definitions rules.

    ---------------------------------------------------------------------------

    \30\ See End-User Exception to Mandatory Clearing of Swaps, 75

    FR 80747, Dec. 23, 2010 (comment period closed June 3, 2011).

    \31\ See Further Definition of ``Swap Dealer,'' ``Security-Based

    Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based

    Swap Participant'' and ``Eligible Contract Participant,'' 75 FR

    80174, Dec. 21, 2010 (joint rulemaking with Securities and Exchange

    Commission (``SEC''), comment period closed June 3, 2011).

    ---------------------------------------------------------------------------

    CMC also requested that the Commission clarify that certain types

    of transactions (embedded options in forward contracts \32\ and book-

    outs \33\) fall within the definition of an excluded forward contract

    rather than the definition of a swap. Similarly, Amcot requested

    clarification that ``equity trades'' or ``options to redeem'' cotton

    from the U.S. Department of Agriculture's Commodity Credit Corporation

    marketing loan program would not be considered swaps. The Working Group

    of Commercial Energy Firms provided several examples of ``transactions

    that energy market participants do not historically consider options,

    but nonetheless contain an element of optionality * * * and should not

    be regulated as swaps.'' These include daily natural gas calls,

    wholesale full requirements contracts for power, tolling agreements in

    organized wholesale electricity markets, physical daily heat rate call

    options, and capacity contracts. APGA and ATA requested that the

    Commission clarify that certain variable amount delivery contracts that

    are common in the energy sector be excluded from the definition of a

    swap. Where applicable, those comments are being considered by the

    Commission, jointly with the SEC, in considering further definitions of

    terms regarding certain products, including the term ``swap,'' pursuant

    to Sec. 712(d) of the Dodd-Frank Act.\34\

    ---------------------------------------------------------------------------

    \32\ See Characteristics Distinguishing Cash and Forward

    Contracts and ``Trade'' Options, Interpretive Statement of the

    Commission's General Counsel, 50 FR 39656, Sept. 30, 1985, regarding

    the differences between forward contracts and options.

    \33\ A book-out is a separate, subsequent agreement whereby two

    commercial parties to a forward contract, who find themselves in a

    delivery chain or circle at the same delivery point, can agree to

    settle (or ``book-out'') their delivery obligations by exchanging a

    net payment. See Statutory Interpretation Regarding Forward

    Transactions, 55 FR 39188, Sept. 25, 1990.

    \34\ See footnote 31, above.

    ---------------------------------------------------------------------------

    V. Explanation of the Final Rules for Swaps in an Agricultural

    Commodity

    A. Introduction

    After considering the complete record in this matter, including all

    comments on both the ANPRM and NPRM, the Commission is adopting the

    revisions to part 35 as proposed. Broadly speaking, the new rules will

    implement regulations whereby swaps in agricultural commodities may

    transact subject to the same rules as all other swaps.

    Specifically, the final rules adopted herein will operate to

    withdraw existing part 35 of the Commission's regulations--thus

    withdrawing the provisions originally adopted in 1993 to provide legal

    certainty for the bilateral swaps market by largely exempting bilateral

    swaps meeting the part 35 conditions from CEA regulation.\35\ In its

    place, pursuant to the exemptive authority in CEA section 4(c) and the

    Commission's authority in CEA section 4c(b),\36\ these final rules

    adopt a new

    [[Page 49296]]

    part 35 to provide the primary authority for transacting swaps in an

    agricultural commodity as authorized by sections 723(c)(3) and 733 of

    the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    \35\ ``[Part 35 * * *] exempt[s] swap agreements (as defined

    herein) meeting specified criteria from regulation under the

    Commodity Exchange Act (the ``Act''). This rule was proposed

    pursuant to authority recently granted the Commission, a purpose of

    which is to give the Commission a means of improving the legal

    certainty of the market for swaps agreements.'' 58 FR 5587, Jan. 22,

    1993.

    \36\ Recall that original part 35 was adopted pursuant to CEA

    sections 4(c) and 4c(b). The Commission is clarifying now that the

    new part 35, which will apply only to swaps in agricultural

    commodities, is similarly adopted pursuant to the authorities found

    in CEA sections 4(c) and 4c(b).

    ---------------------------------------------------------------------------

    B. Withdrawal of Current Part 35

    In enacting the Futures Trading Practices Act of 1992 (the ``1992

    Act''),\37\ Congress added section 4(c) to the CEA and authorized the

    Commission, by rule, regulation, or order, to exempt any agreement,

    contract or transaction, or class thereof, from the exchange-trading

    requirement of CEA section 4(a), or (with minor exceptions not relevant

    here) from any other provision of the Act.\38\ Pursuant to its new

    authority in section 4(c),\39\ the Commission proposed in 1992 \40\ and

    adopted in 1993 \41\ part 35 of the Commission's regulations, generally

    exempting certain swap agreements from the CEA. As explained above,

    part 35 originally applied to all commodities--that is, exempt,

    excluded, and agricultural commodities. However, certain amendments to

    the CEA made by the CFMA had the effect of making part 35 relevant only

    for swaps in agricultural commodities.

    ---------------------------------------------------------------------------

    \37\ Public Law 102-546 (Oct. 28, 1992).

    \38\ While section 4(c) was amended by the Dodd-Frank Act, for

    the purposes of this rulemaking its function and effect have not

    changed. See 4(c) discussion, below.

    \39\ As noted above, original part 35 was also adopted pursuant

    to the Commission's authority in CEA section 4c(b).

    \40\ See the original proposal at 57 FR 53627, Nov. 12, 1992.

    See also 57 FR 58423, Dec. 28, 1992, extending the comment period

    for an additional fourteen days.

    \41\ 58 FR 5587, Jan. 22, 1993.

    ---------------------------------------------------------------------------

    The Dodd-Frank Act amends, repeals, or replaces many CEA sections

    added by the CFMA (including repealing the statutory exemptions for

    swaps in excluded and exempt commodities at pre Dodd-Frank CEA sections

    2(d), 2(g), and 2(h)). To avoid any uncertainty as to whether the

    Commission will allow bilateral swaps in non-agricultural commodities

    to revert to reliance on existing part 35 for exemption from the CEA

    and the Dodd-Frank amendments, the Commission is now repealing and

    replacing current part 35 in its entirety.

    C. New Part 35

    The provisions of new part 35, as proposed in the NPRM and as

    adopted herein, generally provide that agricultural swaps may be

    transacted subject to all provisions of the CEA, and any Commission

    rule, regulation or order thereunder, that is otherwise applicable to

    swaps. New part 35 also clarifies that by issuing a rule allowing

    agricultural swaps to transact subject to the laws and rules applicable

    to all other swaps, the Commission is allowing agricultural swaps to

    transact on DCMs, SEFs, or otherwise to the same extent that all other

    swaps are allowed to trade on DCMs, SEFs, or otherwise.

    D. Effective Date

    The repeal of original part 35 and the rules in new part 35 shall

    become effective on December 31, 2011. This will coincide with the

    expiration of the 4(c) transition relief promulgated by the Commission

    to accommodate the phasing in of the Dodd-Frank swaps rules.\42\

    ---------------------------------------------------------------------------

    \42\ See Effective Date for Swap Regulation, 76 FR 42508, July

    19, 2011 (effective July 14, 2011). As noted by the Commission in

    the transition relief, existing part 35 remains available until part

    35 is repealed or replaced.

    ---------------------------------------------------------------------------

    VI. Findings Pursuant to Section 4(c)

    As noted above, section 723(c)(3)(A) of the Dodd-Frank Act

    prohibits swaps in an agricultural commodity. However, section

    723(c)(3)(B) of the Dodd-Frank Act explicitly provides that the

    Commission may permit swaps in an agricultural commodity pursuant to

    CEA section 4(c), the Commission's general exemptive authority, ``under

    such terms and conditions as the Commission shall prescribe.''

    Accordingly, the amendments to part 35 adopted herein are adopted

    pursuant to CEA section 4(c), as amended by the Dodd-Frank Act.\43\

    ---------------------------------------------------------------------------

    \43\ In addition to 4(c), these final rules are also being

    adopted pursuant to the Commission's authority under CEA section

    4c(b)--just as original part 35 was adopted pursuant to both CEA

    section 4(c) and 4c(b).

    ---------------------------------------------------------------------------

    Section 4(c)(1) of the CEA authorizes the CFTC to exempt any

    transaction or class of transactions from any of the provisions of the

    CEA (subject to exceptions not relevant here) in order to ``promote

    responsible economic or financial innovation and fair competition.''

    \44\ 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. 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.'' \45\

    ---------------------------------------------------------------------------

    \44\ New section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), as

    amended by the Dodd-Frank 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 5 of this Act) exempt any agreement,

    contract, or transaction (or class thereof) that is otherwise

    subject to subsection (a) (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), or from any other

    provision of this Act (except subparagraphs (C)(ii) and (D) of

    section 2(a)(1), except that--

    (A) Unless the Commission is expressly authorized by any

    provision described in this subparagraph to grant exemptions, with

    respect to amendments made by subtitle A of the Wall Street

    Transparency and Accountability Act of 2010--

    (i) With respect to--

    (I) Paragraphs (2), (3), (4), (5), and (7), paragraph

    (18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39),

    (41), (42), (46), (47), (48), and (49) of section 1a, and sections

    2(a)(13), (2)(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a),

    5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and

    (II) Section 206(e) of the Gramm-Leach-Bliley Act (Pub. L. 106-

    102; 15 U.S.C. 78c note); and

    (ii) In sections 721(c) and 742 of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act; and

    (B) 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) if the Commissions

    determine that the exemption would be consistent with the public

    interest.

    \45\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

    ---------------------------------------------------------------------------

    In order to analyze the effect of permitting agricultural swaps to

    trade under the same terms and conditions as other swaps, it is

    appropriate to examine some of the major components of the Dodd-Frank

    Act that apply to swaps generally. The Commission originally performed

    this review in the NPRM, and repeats the analysis here for convenient

    reference: Section 727 of the Dodd-Frank Act adds, among other things,

    a new CEA section 2(a)(13) that mandates that swap transaction and

    pricing data be made available to the public. Section 723(a)(3) of the

    Dodd-Frank Act adds a new CEA section 2(h) that provides that the

    Commission shall determine which swaps are subject to a mandatory

    clearing requirement. New CEA section 2(h) also provides that swaps

    that are required to be cleared must be executed on a DCM or SEF, if a

    DCM or SEF makes the swap available for trading. As noted above, part

    35, as it is currently written, does not permit clearing of

    agricultural swaps and does not contemplate any reporting of

    agricultural swaps data.

    Permitting agricultural swaps to trade under the same terms and

    conditions as other swaps should provide greater certainty and

    stability to existing and

    [[Page 49297]]

    emerging markets so that financial innovation and market development

    can proceed in an effective and competitive manner. Treating all swaps,

    including agricultural swaps, in a consistent manner should provide

    greater certainty to markets. The Dodd-Frank Act reporting and trade

    execution requirements should lead to greater market and price

    transparency, which may improve market competition, innovation, and

    development. Centralized clearing of agricultural swaps by robustly

    regulated central clearinghouses should reduce systemic risk and

    provide greater certainty and stability to markets by reducing

    counterparty risk.

    As noted above, the NPRM requested comment on whether swaps in

    agricultural commodities should be subject to the same legal

    requirements as swaps in other commodities. The overwhelming majority

    of those comments, as summarized above, did in fact support treating

    agricultural swaps the same as every other swap. Further, no commenter

    offered a persuasive argument for treating agricultural swaps

    differently than other swaps under the Dodd-Frank Act. Thus, no

    commenter demonstrated that the proposal to treat agricultural swaps

    the same as every other swap failed to ``promote responsible economic

    or financial innovation and fair competition.''

    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; that 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.\46\

    ---------------------------------------------------------------------------

    \46\ 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 ``ensur[ing] the financial

    integrity of all transactions subject to this Act and the avoidance of

    systemic risk'' and ``promot[ing] responsible innovation and fair

    competition among boards of trade, other markets and market

    participants.'' \47\ As noted above, centralized clearing of

    agricultural swaps (which is not permitted under the current part 35

    rules) should reduce systemic risk. Also, allowing agricultural swaps

    to trade under the general swaps rules contained in the Dodd-Frank Act

    would allow agricultural swaps to trade on SEFs and DCMs (which is

    prohibited under the current part 35 rules) which may result in

    increased innovation and competition in the agricultural swaps market.

    Reducing systemic risk and increasing innovation and competition by

    permitting agricultural swaps to trade under the same terms and

    conditions as other swaps would be consistent with the purposes listed

    above, the general purposes of the CEA, and the public interest.

    ---------------------------------------------------------------------------

    \47\ CEA section 3(b), 7 U.S.C. 5(b).

    ---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act contains substantial new

    clearing and trade execution requirements for swaps. The clearing

    requirement is designed, among other things, to reduce the counterparty

    risk of a swap, and therefore to reduce systemic risk. The swap

    reporting and trade execution requirements should provide additional

    market information to the Commission, the markets, and the public.

    Thus, treating agricultural swaps in the same manner as other swaps may

    enhance the ability of the Commission or Commission-regulated markets

    to discharge their regulatory or self-regulatory responsibilities under

    the CEA.

    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.'' Section 723(a)(2) of the Dodd-

    Frank Act adds, among other things, a new CEA section 2(e) that

    provides: ``It shall be unlawful for any person, other than an eligible

    contract participant, to enter into a swap unless the swap is entered

    into on, or subject to the rules of, a [DCM].'' \48\ In light of the

    comprehensive new regulatory scheme for swaps and the enhancements made

    to the already robust regulatory system concerning DCMs \49\ that are

    contained in the Dodd-Frank Act, the limitation on participation to

    eligible contract participants outside of a DCM, and the ability of

    others to enter into a swap on a DCM, should limit participation to

    appropriate persons. The Commission requested comment on its analysis

    of both section 4(c)(2) and section 4(c)(3). As noted in the comment

    summary above, those commenters addressing the question supported the

    Commission's analysis under both 4(c)(2) and 4(c)(3).

    ---------------------------------------------------------------------------

    \48\ New CEA section 2(e), (7 U.S.C. 2(e)).

    \49\ See, e.g., new CEA section 5(d) (7 U.S.C. 7(d)) as added by

    section 735(b) of the Dodd-Frank Act and amended CEA section 5c (7

    U.S.C. 7a-2) as amended by section 745 of the Dodd-Frank Act.

    ---------------------------------------------------------------------------

    VII. Related Matters

    A. Cost Benefit Considerations

    Section 15(a) of the CEA \50\ requires the Commission to consider

    the costs and benefits of its actions before issuing a rulemaking under

    the Act. By its terms, section 15(a) does not require the Commission to

    quantify the costs and benefits of the rulemaking or to determine

    whether the benefits of the rulemaking outweigh its costs; rather, it

    requires that the Commission ``consider'' the costs and benefits of its

    actions. Section 15(a) 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 rule is necessary or appropriate to protect the public

    interest or to effectuate any of the provisions or accomplish any of

    the purposes of the Act.

    ---------------------------------------------------------------------------

    \50\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    i. Summary of Proposed Requirements

    The proposed rule will replace the swaps exemption in part 35 with

    new rules providing, in general, that agricultural swaps would be

    treated the same as all other swaps. As the Commission continues to

    propose and adopt rules implementing the Dodd-Frank Act, any costs

    associated with adhering to the substantive requirements that govern

    swaps generally are and will be addressed in

    [[Page 49298]]

    those various rulemakings applying to swaps generally. For purposes of

    this discussion, the Commission appropriately considers the costs and

    benefits of treating agricultural swaps as all other swaps are

    treated--as compared to adopting or maintaining a separate regulatory

    regime for agricultural swaps. The Commission has determined that

    treating agricultural swaps the same as other swaps would result in

    lower regulatory cost to both market participants and the Commission,

    because such treatment would eliminate dual regulatory regimes with

    which market participants must comply and the Commission must oversee.

    ii. Market and Public Concern

    (1) Protection of market participants and the public. The Dodd-

    Frank Act added numerous provisions to the CEA to protect market

    participants and the public, such as the segregation of funds for

    uncleared swaps, swap dealer registration and regulation that includes

    business conduct standards, and limitations on conflicts of interest.

    Current part 35 exempts qualifying swaps from nearly all sections of

    the CEA, so that these and other protections contained in Dodd-Frank

    would not apply to agricultural swaps entered into under part 35. As

    noted by commenters, in contrast to part 35, the new Dodd-Frank Act

    regulatory regime is both robust and comprehensive and will provide

    significant new protections to swap market participants.\51\

    ---------------------------------------------------------------------------

    \51\ ``The NGFA believes that these [Dodd-Frank] safeguards

    provide more-than-ample protection in the swaps marketplace for both

    agricultural and non-agricultural swaps and that there is no

    compelling reason to place additional burdens on agricultural

    swaps.'' NGFA letter at 2. See also the Commodity Options and

    Agricultural Swaps Working Group letters. Also, ``In our view,

    applying a single, uniform set of rules to all swaps will advance

    the public interests that Dodd-Frank and the CEA are designed to

    promote and benefit the users of these products.'' CME letter at 1.

    ---------------------------------------------------------------------------

    (2) Efficiency, competitiveness, and financial integrity of futures

    markets. Having a single set of regulations governing all swap

    transactions reduces compliance costs for markets and market

    participants, as well as eases the administrative burden on the

    Commission. Commenters agreed with this analysis.\52\ Furthermore, if

    the Commission did not permit agricultural swaps to transact subject to

    the same laws and rules as other commodity swaps, users of agricultural

    swaps that also engage in other types of swaps would be subject to dual

    regulatory regimes. These streamlined regulations may lead to improved

    efficiency, competitiveness and financial integrity of futures markets.

    ---------------------------------------------------------------------------

    \52\ ``[S]treamling swap regulation so that agricultural swaps

    are treated the same as other swaps will enable the Commission and

    Commission-regulated markets to discharge their regulatory duties

    more efficiently.'' CME letter at 2; see also CMC letter and Barnard

    letter.

    ---------------------------------------------------------------------------

    (3) Price discovery. The Dodd-Frank Act contains numerous

    provisions designed to improve price discovery such as the provisions

    encouraging the clearing of swaps and the trading of swaps on DCMs and

    SEFs. For instance, the Dodd-Frank Act mandates that swap transaction

    and pricing data be made available to the public. This reporting and

    the Dodd-Frank trade execution requirements should foster greater

    market and price transparency, and thus better price discovery.

    (4) Sound risk management practices. Several commenters similarly

    noted that agricultural swaps are important risk management tools and

    that such swaps should be available on the same terms and conditions as

    other swaps that are used to manage risk.\53\ In contrast, original

    part 35, by its terms, would not generally allow for swaps that adhered

    to the clearing or trade execution provisions contained in Dodd-Frank.

    ---------------------------------------------------------------------------

    \53\ ``By applying the same regulatory structure and

    requirements to agricultural swaps as to other commodity swaps, the

    [NPRM] will promote legal certainty and an efficient allocation of

    compliance resources. * * * The costs of imposing an alternative

    regulatory structure on this important and well-functioning market

    would substantially outweigh any benefits. It could also make it

    more difficult for agricultural market participants to hedge their

    commercial risks.'' See Commodity Options and Agricultural Swaps

    Working Group 4/11/11 letter at 2-3; see also Gavilon letters.

    ---------------------------------------------------------------------------

    (5) Other public interest considerations. Treating agricultural

    swaps the same as other swaps would subject those swaps to the numerous

    provisions in the Dodd-Frank Act that protect market participants and

    the public, such as the segregation of funds for uncleared swaps,

    limitations on conflicts of interest, and swap dealer registration and

    regulation that includes business conduct standards.\54\ Moreover, the

    clearing requirement in the Dodd-Frank Act is intended to reduce

    systemic risk which should further protect the public. Thus, concerns

    that are special to agricultural swaps that might have existed under

    the pre Dodd-Frank regulatory regime may be allayed.

    ---------------------------------------------------------------------------

    \54\ ``[A] consistent approach to the regulation of all types of

    commodity swaps would eliminate the need to impose additional

    conditions on agricultural swaps. Equivalent treatment also would

    increase regulatory certainty in commodity markets by allowing

    market participants to structure documentation and compliance

    protocols consistently across commodity desks. Applying many aspects

    of the Dodd-Frank Act to agricultural swaps on an equivalent basis

    as other commodity swaps (e.g., registration, clearing, and

    reporting) also would promote the Commission's stated mission of

    bringing more transparency to the OTC derivatives markets.''

    Commodity Options and Agricultural Swaps Working Group 10/29/10

    letter at 6.

    ---------------------------------------------------------------------------

    iii. Conclusion

    After considering the section 15(a) factors, the Commission has

    determined that the benefits of amended part 35 outweigh the costs.

    B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires that agencies

    consider whether the rules they propose will have a significant

    economic impact on a substantial number of small entities and, if so,

    provide a regulatory flexibility analysis respecting the impact.\55\

    The proposed rule, in replacing part 35, would affect eligible swap

    participants (``ESPs'') (by eliminating the ESP category and requiring

    agricultural swap participants to be eligible contract participants

    (``ECPs''), unless the transaction occurs on a designated contract

    market (``DCM'')). By mandating that agricultural swaps and options be

    treated as all other swaps, the effect of the proposed rule has the

    potential to affect DCMs, derivatives clearing organizations

    (``DCOs''), futures commission merchants (``FCMs''), large traders and

    ECPs, as well as swap dealers (``SDs''), major swap participants

    (``MSPs''), commodity pool operators (``CPOs''), swap execution

    facilities (``SEFs''), and swap data repositories (``SDRs'').

    ---------------------------------------------------------------------------

    \55\ 5 U.S.C. 601 et seq.

    ---------------------------------------------------------------------------

    i. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESPs. The

    Commission has previously determined that DCMs, DCOs, FCMs, CPOs, large

    traders, ECPs, and ESPs are not small entities for purposes of the

    Regulatory Flexibility Act.\56\ Accordingly, the Chairman, on behalf of

    the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that these

    final rules will not have a significant economic impact on a

    substantial number of small entities with respect to these entities.

    ---------------------------------------------------------------------------

    \56\ See, respectively and as indicated, 47 FR 18618, 18619,

    Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); 66 FR 45604, at

    45609, Aug. 29, 2001 (DCOs); 66 FR 20740, 20743, Apr. 25, 2001

    (ECPs); and 57 FR 53627, 53630, Nov. 12, 1992 and 58 FR 5587, 5593,

    Jan. 22, 1993 (ESPs).

    ---------------------------------------------------------------------------

    ii. SDs, MSPs, SEFs, and SDRs. SDs, MSPs, SEFs, and SDRs are new

    categories of registrant under the Dodd-Frank Act. Therefore, the

    Commission has not previously addressed the question of whether SDs,

    MSPs, SEFs, and SDRs are, in fact, ``small entities'' for purposes of

    the RFA. For the reasons that follow, the Commission is hereby

    [[Page 49299]]

    determining that none of these entities would be small entities.

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that these final rules, with

    respect to SDs, MSPs, SEFs, and SDRs, will not have a significant

    impact on a substantial number of small entities.

    a. SDs: As noted above, the Commission previously has determined

    that FCMs are not small entities for the purpose of the RFA based upon,

    among other things, the requirements that FCMs meet certain minimum

    financial requirements that enhance the protection of customers'

    segregated funds and protect the financial condition of FCMs

    generally.\57\ SDs similarly will be subject to minimum capital and

    margin requirements, and are expected to comprise the largest global

    financial firms. Entities that engage in a de minimis quantity of swap

    dealing in connection with transactions with or on behalf of its

    customers will be exempted from designation as an SD. For purposes of

    the RFA in this rulemaking, the Commission is hereby determining that

    SDs are not ``small entities'' for essentially the same reasons that

    FCMs have previously been determined not to be small entities.

    ---------------------------------------------------------------------------

    \57\ 47 FR 18619.

    ---------------------------------------------------------------------------

    b. MSPs: The Commission also has determined that large traders are

    not small entities for the purpose of the RFA.\58\ The Commission

    considered the size of a trader's position to be the only appropriate

    test for purposes of large trader reporting.\59\ MSPs, among other

    things, maintain substantial positions in swaps, creating substantial

    counterparty exposure that could have serious adverse effects on the

    financial stability of the United States banking system or financial

    markets. For purposes of the RFA, the Commission is hereby determining

    that MSPs are not ``small entities'' for essentially the same reasons

    that large traders have previously been determined not to be small

    entities.

    ---------------------------------------------------------------------------

    \58\ Id. at 18620.

    \59\ Id.

    ---------------------------------------------------------------------------

    c. SEFs: The Dodd-Frank Act defines a SEF to mean a trading system

    or platform in which multiple participants have the ability to accept

    bids and offers made by multiple participants in the facility or

    system, through any means of interstate commerce, including any trading

    facility that facilitates the execution of swaps between persons and is

    not a DCM. The Commission has previously determined that a DCM is not a

    small entity because, among other things, it may only be designated

    when it meets specific criteria, including expenditure of sufficient

    resources to establish and maintain adequate self-regulatory programs.

    Likewise, the Commission will register an entity as a SEF only after it

    has met specific criteria, including the expenditure of sufficient

    resources to establish and maintain an adequate self-regulatory

    program. Accordingly, as with DCMs, the Commission is hereby

    determining that SEFs are not ``small entities'' for purposes of the

    RFA.

    d. SDRs: The Commission has previously determined that DCMs and

    DCOs are not small entities because of ``the central role'' they play

    in ``the regulatory scheme concerning futures trading.'' \60\ Because

    of the ``importance of futures trading in the national economy,'' to be

    designated as a contract market or registered as a DCO, the respective

    entity must meet stringent requirements set forth in the CEA.\61\

    Similarly, swap transactions that are reported and disseminated by SDRs

    are an important part of the national economy. SDRs will receive data

    from market participants and will be obligated to facilitate swaps

    execution by reporting real-time data.\62\ Similar to DCOs and DCMs,

    SDRs will play a central role both in the regulatory scheme covering

    swaps trading and in the overall market for swap transactions.

    Additionally, the Dodd-Frank Act allows DCOs to register as SDRs.

    Accordingly, for essentially the same reasons that DCOs and DCMs have

    previously been determined not to be small entities, the Commission is

    hereby determining that SDRs are not ``small entities'' for purposes of

    the RFA.

    ---------------------------------------------------------------------------

    \60\ 47 FR at 18619 (DCMs) and 66 FR at 45609 (DCOs).

    \61\ See new CEA section 5(d), as added by section 735(b) of the

    Dodd-Frank Act regarding DCM core principles and new CEA section

    5b(c)(2), as added by section 725(c) of the Dodd-Frank Act regarding

    DCO core principles.

    \62\ See new CEA section 21, as added by section 728 of the

    Dodd-Frank Act.

    ---------------------------------------------------------------------------

    C. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA),\63\ an agency may not

    conduct or sponsor, and a person is not required to respond to, a

    collection of information unless it displays a currently valid control

    number from the Office of Management and Budget (OMB). The Commission

    believes that these proposed rules will not impose any new information

    collection requirements that require approval of OMB under the PRA.

    ---------------------------------------------------------------------------

    \63\ 44 U.S.C. 3501 et seq.

    ---------------------------------------------------------------------------

    In the NPRM, the Commission noted that, as a general matter, the

    proposed rules would allow agricultural swaps to trade under the same

    terms and conditions as all other swaps and that the proposed rules do

    not, by themselves, impose any new information collection requirements.

    The NPRM also noted that collections of information that may be

    associated with engaging in agricultural swaps are, or will be,

    addressed within each of the general swap-related rulemakings

    implementing the Dodd-Frank Act. The Commission requested public

    comment on the accuracy of its estimate that no additional information

    collection requirements or changes to existing collection requirements

    would result from the rules proposed herein, and none of the comments

    received addressed this request.

    Therefore, the Commission notes that, as a general matter, the

    final rules adopted herein will allow agricultural swaps to trade under

    the same terms and conditions as all other swaps and that the final

    rules do not, by themselves, impose any new information collection

    requirements. Collections of information that may be associated with

    engaging in agricultural swaps are, or will be, addressed within each

    of the general swap-related rulemakings implementing the Dodd-Frank

    Act.

    VIII. Final Rules

    List of Subjects in 17 CFR Part 35

    Commodity futures.

    In consideration of the foregoing and pursuant to the authority

    contained in the Act, as indicated herein, the Commission hereby amends

    chapter I of title 17 of the Code of Federal Regulations as follows:

    0

    1. Revise part 35 to read as follows:

    PART 35--SWAPS IN AN AGRICULTURAL COMMODITY (AGRICULTURAL SWAPS)

    Authority: 7 U.S.C. 2, 6(c), and 6c(b); and title VII, sec.

    723(c)(3), Pub. L. 111-203, 124 Stat. 1376, unless otherwise noted.

    Sec. 35.1 Agricultural swaps, generally.

    (a) Any person or group of persons may offer to enter into, enter

    into, confirm the execution of, maintain a position in, or otherwise

    conduct activity related to, any transaction in interstate commerce

    that is a swap in an agricultural commodity subject to all provisions

    of the Act, including any Commission rule, regulation, or order

    thereunder, otherwise applicable to any other swap; and

    (b) In addition to paragraph (a) of this section, any transaction

    in interstate

    [[Page 49300]]

    commerce that is a swap in an agricultural commodity may be transacted

    on a swap execution facility, designated contract market, or otherwise

    in accordance with all provisions of the Act, including any Commission

    rule, regulation, or order thereunder, applicable to any other swap

    eligible to be transacted on a swap execution facility, designated

    contract market, or otherwise.

    Issued in Washington, DC, on August 4, 2011, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Agricultural Swaps--Commission Voting Summary and

    Statements of Commissioners

    Note: The following appendices will not appear in the Code of

    Federal Regulations

    Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Dunn,

    Sommers, Chilton and O'Malia voted in the affirmative; no

    Commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rulemaking to authorize agricultural swap

    transactions and subject them to the same rules applicable to all

    other swaps transactions. The Dodd-Frank Wall Street Reform and

    Consumer Protection Act (Dodd-Frank Act) prohibits such transactions

    if the Commodity Futures Trading Commission (CFTC) does not

    specifically authorize them. The public comments the CFTC received

    overwhelmingly supported treating agricultural swaps the same as

    other swaps brought under regulation by the Dodd-Frank Act.

    Agricultural producers, processers, merchants and handlers will

    benefit from the ability to use agricultural swaps to hedge their

    risk and from the transparency of the Dodd-Frank Act.

    [FR Doc. 2011-20337 Filed 8-9-11; 8:45 am]

    BILLING CODE P

    Last Updated: August 10, 2011



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