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, [email protected], or Ryne Miller, Attorney
Advisor, (202) 418-5921, [email protected], 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.
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\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.
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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.
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\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).
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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\
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\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.
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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.
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\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).
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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.
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\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.
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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\
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\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.
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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\
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\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).
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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\
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\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.
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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\
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\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.
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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).
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\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.
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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.
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\50\ 7 U.S.C. 19(a).
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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\
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\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.
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(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.
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\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.
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(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.
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\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.
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(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.
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\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.
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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'').
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\55\ 5 U.S.C. 601 et seq.
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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.
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\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).
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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.
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\57\ 47 FR 18619.
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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.
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\58\ Id. at 18620.
\59\ Id.
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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.
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\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.
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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.
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\63\ 44 U.S.C. 3501 et seq.
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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