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2011-31355

  • Federal Register, Volume 76 Issue 240 (Wednesday, December 14, 2011)[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]

    [Rules and Regulations]

    [Pages 77670-77672]

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

    [FR Doc No: 2011-31355]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AD64

    Retail Commodity Transactions Under Commodity Exchange Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Interpretation; Request for comments.

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

    ``CFTC'') is issuing this interpretation of the term ``actual

    delivery'' as set forth in section 2(c)(2)(D)(ii)(III)(aa) of the

    Commodity Exchange Act (``CEA'') pursuant to section 742(a) of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act. The

    Commission requests comment on whether this interpretation accurately

    construes the statutory language. In the event that comments

    demonstrate a need to modify this interpretation, the Commission will

    take appropriate action.

    DATES: Effective December 14, 2011. Comments must be received by

    February 13, 2012.

    ADDRESSES: Comments, identified by RIN number, may be sent by any of

    the following methods:

    Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments

    through the Web site.

    Mail: David A. Stawick, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel,

    Division of Enforcement, (312) 596-0538, rhollinger@cftc.gov, or Martin

    B. White, Assistant General Counsel, Office of the General Counsel,

    (202) 418-5129, mwhite@cftc.gov, Commodity Futures Trading Commission,

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

    All comments must be submitted in English, or, if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that may be exempt from disclosure under the Freedom of

    Information Act (``FOIA''),\1\ a petition for confidential treatment of

    the exempt information may be submitted according to the established

    procedures in Sec. 145.9 of the CFTC's regulations.\2\ The Commission

    reserves the right, but shall have no obligation, to review, prescreen,

    filter, redact, refuse, or remove any or all of your submission from

    http://www.cftc.gov that it may deem to be inappropriate for

    publication, such as obscene language. All submissions that have been

    redacted or removed that contain comments on the merits of the

    rulemaking will be retained in the public comment file and will be

    considered as required under the Administrative Procedure Act and other

    applicable laws, and may be accessible under FOIA.

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    \1\ 5 U.S.C. 552.

    \2\ 17 CFR 145.9.

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ Title VII

    of the Dodd-Frank Act \4\ amended the Commodity Exchange Act (``CEA'')

    \5\ 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

    [[Page 77671]]

    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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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection

    Act of 2010, 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.

    \4\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

    \5\ 7 U.S.C. 1 et seq.

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    In addition, section 742(a) of the Dodd-Frank Act amends section

    2(c)(2) of the CEA to add a new subparagraph, section 2(c)(2)(D) of the

    CEA,\6\ entitled ``Retail Commodity Transactions.'' New CEA section

    2(c)(2)(D) provides the Commission with a new source of jurisdiction

    over certain retail commodity transactions.\7\ Congress enacted this

    provision following court decisions, including CFTC v. Zelener,\8\ that

    narrowly interpreted the term ``contract of sale of a commodity for

    future delivery''--the statutory term for a futures contract--based on

    language in customer agreements. Zelener involved retail foreign

    currency transactions that were characterized as spot sales in contract

    documents, but in which, in practice, customer positions were held open

    indefinitely and customers never took delivery of foreign currency.\9\

    Zelener held that the transactions were not subject to CFTC

    jurisdiction because they did not involve futures contracts but were

    ``in form, spot sales for delivery within 48 hours.'' \10\ In so

    ruling, the court focused solely on the language of the customer

    agreements.

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    \6\ 7 U.S.C. 2(c)(2)(D).

    \7\ The jurisdictional grant provided to the Commission by new

    CEA section 2(c)(2)(D) is in addition to, and independent from, the

    jurisdiction over contracts of sale of a commodity for future

    delivery and transactions subject to regulation pursuant to CEA

    section 19 that the CEA has historically granted to the Commission.

    The jurisdictional grant provided by new CEA section 2(c)(2)(D) is

    also in addition to, and independent from, the jurisdiction over

    swaps granted to the Commission by the Dodd-Frank Act.

    \8\ 373 F.3d 861 (7th Cir. 2004); see also CFTC v. Erskine, 512

    F.3d 309 (6th Cir. 2008).

    \9\ 373 F.3d at 863-64.

    \10\ Id. at 868-69.

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    Following Zelener, Congress provided the Commission with additional

    authority over retail foreign currency transactions in the CFTC

    Reauthorization Act of 2008.\11\ Similarly, in section 742(a) of the

    Dodd-Frank Act, Congress provided the Commission with additional

    authority over non-foreign currency retail commodity transactions by

    making specified forms of these transactions subject to certain

    provisions of the CEA regardless of whether they involve a ``contract

    of sale of a commodity for future delivery.'' Senator Lincoln explained

    the rationale for this legislation during floor debate on the Dodd-

    Frank Act:

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    \11\ Food, Conservation and Energy Act of 2008, Public Law 110-

    246, 122 Stat. 1651 (2008).

    [the] contracts [in Zelener] function just like futures contracts,

    but the court of appeals, * * * based on the wording of the contract

    documents, held them to be spot contracts outside of CFTC

    jurisdiction. The CFTC Reauthorization Act of 2008, which was

    enacted as part of that year's Farm Bill, clarified that such

    transactions in foreign currency are subject to CFTC anti-fraud

    authority. It left open the possibility, however, that such Zelener-

    type contracts could still escape CFTC jurisdiction if used for

    other commodities such as energy and metals.

    Section 742 corrects this by extending the Farm Bill's ``Zelener

    fraud fix'' to retail off-exchange transactions in all commodities.

    Further, a transaction with a retail customer that meets the

    leverage and other requirements set forth in Section 742 is subject

    not only to the anti-fraud provisions of CEA Section 4b (which is

    the case for foreign currency), but also to the on-exchange trading

    requirement of CEA Section 4(a), ``as if'' the transaction was a

    futures contract.\12\

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    \12\ 156 Cong. Rec. S5,924 (daily ed. July 15, 2010) (statement

    of Sen. Lincoln); see also Hearing to Review Implications of the

    CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities

    and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52-

    664 (2009) (``In 2004 the Seventh Circuit Court made a decision in

    the CFTC v. Zelener [case]. It adopted a narrow definition of the

    term `transactions for future delivery.' What it held is that a 3-

    day contract offered to retail customers for foreign currency that

    on its face promised delivery was not a futures contract and was,

    therefore, outside the CFTC's jurisdiction. This was even though the

    contracts operated in practice as futures contracts. Following the

    Zelener decision, many [fraudsters] were given a roadmap to evade

    CFTC jurisdiction and to scam customers or consumers.'') (statement

    of Hon. Leonard L. Boswell, United States Representative and

    Chairman, Subcommittee on General Farm Commodities and Risk

    Management); (``What we are talking about here though is expanding

    the--well, correcting would be the argument the Zelener

    interpretation of what a futures contract is. If in substance it is

    a futures contract, it is going to be regulated. It doesn't matter

    how clever your draftsmanship is.'') (statement of Hon. Jim

    Marshall, United States Representative).

    Accordingly, new CEA section 2(c)(2)(D) broadly applies to any

    agreement, contract, or transaction in any commodity that is entered

    into with, or offered to (even if not entered into with), a non-

    eligible contract participant or non-eligible commercial entity on a

    leveraged or margined basis, or financed by the offeror, the

    counterparty, or a person acting in concert with the offeror or

    counterparty on a similar basis.\13\ New CEA section 2(c)(2)(D) further

    provides that such an agreement, contract, or transaction shall be

    subject to CEA sections 4(a),\14\ 4(b),\15\ and 4b \16\ ``as if the

    agreement, contract, or transaction was a contract of sale of a

    commodity for future delivery.'' \17\

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    \13\ 7 U.S.C. 2(c)(2)(D)(i).

    \14\ 7 U.S.C. 6(a).

    \15\ 7 U.S.C. 6(b).

    \16\ 7 U.S.C. 6b.

    \17\ 7 U.S.C. 2(c)(2)(D)(iii).

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    New CEA section 2(c)(2)(D) excepts certain transactions from its

    application. In particular, new CEA section 2(c)(2)(D)(ii)(III)(aa)

    \18\ excepts a contract of sale that ``results in actual delivery

    within 28 days or such other longer period as the Commission may

    determine by rule or regulation based upon the typical commercial

    practice in cash or spot markets for the commodity involved.'' \19\

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    \18\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).

    \19\ The Commission has not adopted any regulations permitting a

    longer actual delivery period for any commodity pursuant to new CEA

    section 2(c)(2)(D)(ii)(III)(aa). Accordingly, the 28-day actual

    delivery period set forth in this provision remains applicable to

    all commodities.

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    The Commission is issuing this interpretation to inform the public

    of the Commission's views as to the meaning of the term ``actual

    delivery'' as used in new CEA section 2(c)(2)(D)(ii)(III)(aa) and to

    provide the public with guidance on how the Commission intends to

    assess whether any given transaction results in actual delivery within

    the meaning of the statute.\20\ The Commission requests comment on

    whether its interpretation of ``actual delivery'' accurately construes

    the statutory language.

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    \20\ In 1985, the Commission's Office of General Counsel issued

    a staff interpretation determining whether certain hypothetical

    precious metals transactions would be subject to regulation under

    the CEA. Interpretive Letter 85-2, Bank Activities Involving the

    Sale of Precious Metals (CFTC Office of General Counsel Aug. 6,

    1985), Comm. Fut. L. Rep. (CCH) ] 22,673 (``Letter 85-2''). Letter

    85-2 opined on whether the hypothetical transactions would

    constitute leverage contracts, as defined by 17 CFR 31.4(w), or

    contracts of sale of a commodity for future delivery, as that term

    is used in CEA section 2(a)(1)(A). Letter 85-2 is not relevant to a

    determination of whether ``actual delivery'' has occurred within the

    meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa) for several

    reasons, including, but not limited to, the following: (1) Letter

    85-2 predates new CEA section 2(c)(2)(D) by approximately 26 years

    and therefore does not purport to construe new CEA section

    2(c)(2)(D); (2) to the extent Letter 85-2 assumes the occurrence of

    delivery of a commodity, it does not purport to determine whether

    ``actual delivery'' has occurred under new CEA section

    2(c)(2)(D)(ii)(III)(aa); and (3) new CEA section 2(c)(2)(D)(iii)

    explicitly subjects certain retail commodity transactions to CEA

    sections 4(a), 4(b), and 4b ``as if'' they were contracts of sale of

    a commodity for future delivery, regardless of whether they are, in

    fact, contracts of sale of a commodity for future delivery under CEA

    section 2(a)(1)(A).

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    This interpretation does not address the meaning or scope of new

    CEA section 2(c)(2)(D)(ii)(III)(bb) \21\ or any exception to new CEA

    section 2(c)(2)(D) other than new CEA section 2(c)(2)(D)(ii)(III)(aa).

    Similarly, this

    [[Page 77672]]

    interpretation does not address the meaning or scope of contracts of

    sale of a commodity for future delivery, the forward contract exclusion

    from the term ``future delivery'' set forth in CEA section 1a(27),\22\

    or the forward contract exclusion from the term ``swap'' set forth in

    CEA section 1a(47)(B)(ii).\23\ Nor does this interpretation alter any

    statutory interpretation or statement of Commission policy relating to

    the forward contract exclusion.\24\

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    \21\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(bb).

    \22\ 7 U.S.C. 1a(27).

    \23\ 7 U.S.C. 1a(47)(B)(ii).

    \24\ See, e.g., Statutory Interpretation Concerning Forward

    Transactions, 55 FR 39188 (Sept. 25, 1990) (``Brent

    Interpretation'').

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    II. Commission Interpretation of ``Actual Delivery''

    In the view of the Commission, the determination of whether

    ``actual delivery'' has occurred within the meaning of new CEA section

    2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding

    delivery beyond the four corners of contract documents. This

    interpretation of the statutory language is based on Congress's use of

    the word ``actual'' to modify ``delivery'' and on the legislative

    history of new CEA section 2(c)(2)(D)(ii)(III)(aa) described above.

    Consistent with this interpretation of the statutory language, in

    determining whether actual delivery has occurred within 28 days, the

    Commission will employ a functional approach and examine how the

    agreement, contract, or transaction is marketed, managed, and

    performed, instead of relying solely on language used by the parties in

    the agreement, contract, or transaction. This approach best

    accomplishes Congress's intent when it enacted section 742(a) of the

    Dodd-Frank Act and gives full meaning to Congress's term ``actual

    delivery.''

    Relevant factors in this determination include the following:

    ownership, possession, title, and physical location of the commodity

    purchased or sold, both before and after execution of the agreement,

    contract, or transaction; the nature of the relationship between the

    buyer, seller, and possessor of the commodity purchased or sold; and

    the manner in which the purchase or sale is recorded and completed. The

    Commission provides the following examples to illustrate how it will

    determine whether actual delivery has occurred within the meaning of

    new CEA section 2(c)(2)(D)(ii)(III)(aa).

    Example 1: Actual delivery will have occurred if, within 28

    days, the seller has physically delivered the entire quantity of the

    commodity purchased by the buyer, including any portion of the

    purchase made using leverage, margin, or financing, into the

    possession of the buyer and has transferred title to that quantity

    of the commodity to the buyer.

    Example 2: Actual delivery will have occurred if, within 28

    days, the seller has physically delivered the entire quantity of the

    commodity purchased by the buyer, including any portion of the

    purchase made using leverage, margin, or financing, whether in

    specifically segregated or fungible bulk form, into the possession

    of a depository other than the seller and its parent company,

    partners, agents, and other affiliates, that is: (a) A financial

    institution as defined by the CEA; (b) a depository, the warrants or

    warehouse receipts of which are recognized for delivery purposes for

    any commodity on a contract market designated by the Commission; or

    (c) a storage facility licensed or regulated by the United States or

    any United States agency, and has transferred title to that quantity

    of the commodity to the buyer.\25\

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    \25\ Based on Examples 1 and 2, an agreement, contract, or

    transaction that results in ``physical delivery'' within the meaning

    of section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code

    would ordinarily result in ``actual delivery'' under new CEA section

    2(c)(2)(D)(ii)(III)(aa), absent other evidence indicating that the

    purported delivery is a sham. See Model State Commodity Code Sec.

    1.04(a)(2)(i)-(iii), Comm. Fut. L. Rep. Archive (CCH) ] 22,568 (Apr.

    5, 1985). Conversely, an agreement, contract, or transaction that

    does not result in ``physical delivery'' within the meaning of

    section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code is

    highly unlikely to result in ``actual delivery'' under new CEA

    section 2(c)(2)(D)(ii)(III)(aa).

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    Example 3: Actual delivery will not have occurred if, within 28

    days, a book entry is made by the seller purporting to show that

    delivery of the commodity has been made to the buyer and/or that a

    sale of a commodity has subsequently been covered or hedged by the

    seller through a third party contract or account, but the seller has

    not, in accordance with the methods described in Example 1 or 2,

    physically delivered the entire quantity of the commodity purchased

    by the buyer, including any portion of the purchase made using

    leverage, margin, or financing, and transferred title to that

    quantity of the commodity to the buyer, regardless of whether the

    agreement, contract, or transaction between the buyer and seller

    purports to create an enforceable obligation on the part of the

    seller, or a parent company, partner, agent, or other affiliate of

    the seller, to deliver the commodity to the buyer.

    Example 4: Actual delivery will not have occurred if, within 28

    days, the seller has purported to physically deliver the entire

    quantity of the commodity purchased by the buyer, including any

    portion of the purchase made using leverage, margin, or financing,

    in accordance with the method described in Example 2, and transfer

    title to that quantity of the commodity to the buyer, but the title

    document fails to identify the specific financial institution,

    depository, or storage facility with possession of the commodity,

    the quality specifications of the commodity, the identity of the

    party transferring title to the commodity to the buyer, and the

    segregation or allocation status of the commodity.

    Example 5: Actual delivery will not have occurred if, within 28

    days, an agreement, contract, or transaction for the purchase or

    sale of a commodity is rolled, offset, or otherwise netted with

    another transaction or settled in cash between the buyer and the

    seller, but the seller has not, in accordance with the methods

    described in Example 1 or 2, physically delivered the entire

    quantity of the commodity purchased by the buyer, including any

    portion of the purchase made using leverage, margin, or financing,

    and transferred title to that quantity of the commodity to the

    buyer, regardless of whether the agreement, contract, or transaction

    between the buyer and seller purports to create an enforceable

    obligation on the part of the seller, or a parent company, partner,

    agent, or other affiliate of the seller, to deliver the commodity to

    the buyer.

    Issued in Washington, DC, on December 1, 2011 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2011-31355 Filed 12-13-11; 8:45 am]

    BILLING CODE P

    Last Updated: December 14, 2011