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2012-9888

  • Federal Register, Volume 77 Issue 82 (Friday, April 27, 2012)[Federal Register Volume 77, Number 82 (Friday, April 27, 2012)]

    [Rules and Regulations]

    [Pages 25320-25344]

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

    [FR Doc No: 2012-9888]

    [[Page 25319]]

    Vol. 77

    Friday,

    No. 82

    April 27, 2012

    Part IV

    Commodity Futures Trading Commission

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    17 CFR Parts 3, 32, and 33

    Commodity Options; Final Rule and Interim Final Rule

    Federal Register / Vol. 77 , No. 82 / Friday, April 27, 2012 / Rules

    and Regulations

    [[Page 25320]]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Parts 3, 32, and 33

    RIN 3038-AD62

    Commodity Options

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final rule and interim final rule.

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

    ``CFTC'') is issuing a final rule to repeal and replace the

    Commission's current regulations concerning commodity options. The

    Commission is also issuing an interim final rule (with a request for

    additional comment) that incorporates a trade option exemption into the

    final rules for commodity options (added Sec. 32.3). For a transaction

    to be within the trade option exemption, the option, the offeror

    (seller), and the offeree (buyer), as applicable, must satisfy certain

    eligibility requirements, including that the option, if exercised, be

    physically settled, that the option seller meet certain eligibility

    requirements, and that the option buyer be a commercial user of the

    commodity underlying the option, and certain other regulatory

    conditions. Only comments pertaining to the interim final rule will be

    considered in any further action related to these rules.

    DATES: Effective date: The effective date for this final rule and the

    interim final rule June 26, 2012.

    Comment date: Comments on Sec. 32.3, the interim final rule

    portion of this document, must be received on or before June 26, 2012.

    Compliance date: For compliance dates for these final rules, see

    SUPPLEMENTARY INFORMATION at section IV(D), below.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD62,

    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.

    Courier: Same as mail above.

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

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    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 CFTC to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the CFTC's regulations.\1\

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    \1\ 17 CFR 145.9.

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    The CFTC reserves the right, but shall have no obligation, to

    review, pre-screen, 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 this action 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 the Freedom

    of Information Act.

    FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

    Counsel, (202) 418-5041, dheitman@cftc.gov, Division of Market

    Oversight; Ryne Miller, Attorney Advisor, (202) 418-5921,

    rmiller@cftc.gov, Division of Market Oversight; or David Aron, Counsel,

    (202) 418-6621, daron@cftc.gov, Office of the General Counsel,

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

    Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Table of Contents

    I. Introduction

    A. Dodd-Frank Act

    B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule

    and Interim Final Rule

    II. Commodity Options Background

    A. Commission's Plenary Statutory Authority Over Commodity

    Options

    B. The NPRM Proposed an Overhaul of Existing Commodity Options

    Regulations

    III. Comments on the Commodity Options Proposal in the NPRM

    A. Request for Comment on the NPRM

    B. Summary of Comments on the NPRM

    1. General Overview

    2. Comments on the Commodity Options Proposal

    a. Whether the Definition of Swap Includes Commodity Options

    b. Trade Option Exemption

    c. Eligible Contract Participants and Trade Options

    d. FERC-Regulated Transactions

    e. Deleting the Dealer Option Provisions

    f. Deleting the Agricultural Trade Option Provisions

    g. Options Fraud Provisions

    IV. Explanation of the Final Rule and Interim Final Rule for

    Commodity Options

    A. Introduction

    B. Sections Unchanged From the NPRM

    C. New Part 32

    1. Final Rule

    2. Interim Final Rule; Trade Option Exemption

    a. Exemption From General Swaps Rules

    b. Offeror

    c. Offeree

    d. Physical Commodity Option

    e. Trade Option Exemption Conditions

    i. Recordkeeping Pursuant to Part 45

    ii. Reporting Pursuant to Part 45

    iii. Annual Notice Filing Alternative to Part 45 Reporting; Form

    TO

    iv. Specific Request for Comment on Trade Option Reporting and/

    or Notice Filing Requirements

    v. Swaps Large Trader Reporting; Position Limits

    vi. SD/MSP Conditions

    vii. Enforcement Provisions

    viii. General Exemptive Authority Retained

    D. Effective Date; Compliance Date

    V. Interim Final Rule Matters

    VI. Request for Comment on Interim Final Rule

    VII. Related Matters

    A. Cost Benefit Considerations

    1. Background

    2. Statutory Mandate To Consider the Costs and Benefits of the

    Commission's Action: CEA Section15(a)

    3. Benefits and Costs of the Final Rule

    a. Benefits

    b. Costs

    4. Interim Final Rule Benefits and Costs

    a. Benefits

    b. Costs

    c. Costs and Benefits as Compared to Alternatives

    5. Section 15(a) Factors (of the Final Rule and Interim Final

    Rule as a Whole)

    a. Protection of Market Participants and the Public

    b. Efficiency, Competitiveness, and Financial Integrity of the

    Markets

    c. Price Discovery

    d. Sound Risk Management Procedures

    e. Other Public Interest Considerations

    6. Request for Comment on CBC in Connection With Interim Final

    Rule

    B. Regulatory Flexibility Analysis

    1. DCMs, DCOs, FCMs, CPOs, Large Traders, ECPs, and ESPs

    2. SDs, MSPs, SEFs, and SDRs

    3. Entities Eligible To Engage in Options on Physical

    Commodities on DCMs Under Part 33

    4. Entities Engaged in Options Under Sec. 32.13(g)

    5. Entities Engaged in Options Under existing Sec. 32.4

    C. Paperwork Reduction Act

    VIII. Final Rule and Interim Final Rule

    I. Introduction

    A. Dodd-Frank Act

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

    Reform and Consumer Protection Act

    [[Page 25321]]

    (``Dodd-Frank Act'').\2\ Title VII of the Dodd-Frank Act \3\ amended

    the Commodity Exchange Act (``CEA'' or ``Act'') \4\ 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 (``SDs'') and major swap

    participants (``MSPs''); (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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    \2\ 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.

    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

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

    2010.''

    \4\ 7 U.S.C. 1 et seq.

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    B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule and

    Interim Final Rule

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

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

    or transaction commonly known as,'' among other things, ``a commodity

    swap,'' \5\ but also ``[an] option of any kind that is for the purchase

    or sale, or based on the value, of 1 or more * * * commodities * * *.''

    \6\ As a result of the Dodd-Frank changes, on February 3, 2011, the

    Commission published in the Federal Register a notice of proposed

    rulemaking (``NPRM'') that included proposed regulations for commodity

    options.\7\ This final rule and interim final rule relates to the

    commodity options proposal in the NPRM. In particular, the final rule

    issued herein adopts the Commission's proposal to generally permit

    market participants to trade commodity options, which are statutorily

    defined as swaps,\8\ subject to the same rules applicable to every

    other swap. The interim final rule adopted herein includes a trade

    option exemption for physically delivered commodity options purchased

    by commercial users of the commodities underlying the options, subject

    to certain conditions. This final rule and interim final rule also

    renumbers the commodity options rules, as compared to the proposal in

    the NPRM, and deletes a provision from the proposed rules that the

    Commission has determined is no longer relevant.

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    \5\ 7 U.S.C. 1a(47)(A)(iii)(XXII).

    \6\ See 7 U.S.C. 1a(47)(A)(i). Note that the swap definition

    excludes options on futures (which must be traded on a DCM pursuant

    to part 33 of the Commission's regulations) (see CEA section

    1a(47)(B)(i), 7 U.S.C. 1a(47)(B)(i)), but it includes options on

    physical commodities (whether or not traded on a DCM) (see CEA

    section 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i)). Other options excluded

    from the statutory definition of swap are 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 CEA section 1a(47)(B)(iii), 7 U.S.C. 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 CEA section 1a(47)(B)(iv), 7 U.S.C.

    1a(47)(B)(iv)). Note also that the Commission's regulations define a

    commodity option transaction or commodity option as ``any

    transaction or agreement in interstate commerce which is or is held

    out to be of the character of, or is commonly known to the trade as,

    an `option,' `privilege,' `indemnity,' `bid,' `offer,' `call,'

    `put,' `advance guaranty' or `decline guaranty'.'' 17 CFR 1.3(hh).

    For purposes of this release, the Commission uses the term

    ``commodity options'' to apply solely to commodity options not

    excluded from the swap definition set forth in CEA section

    1a(47)(A), 7 U.S.C. 1a(47)(A). As will be discussed in greater

    detail below, the Commission is undertaking a definitions rulemaking

    in conjunction with the Securities and Exchange Commission (``SEC'')

    to further define, among other things, the term ``swap.'' See

    Further Definition of ``Swap,'' ``Security-Based Swap,'' and

    ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap

    Agreement Recordkeeping, 76 FR 29818, May 23, 2011 (``Product

    Definitions NPRM''). The final rule and interpretations that result

    from the Product Definitions NPRM will address the determination of

    whether a commodity option or a transaction with optionality is

    subject to the swap definition in the first instance. If a commodity

    option or a transaction with optionality is excluded from the scope

    of the swap definition, as further defined by the Commission and the

    SEC, the final rule and/or interim final rule adopted herein are not

    applicable.

    \7\ Commodity Options and Agricultural Swaps, 76 FR 6095, Feb.

    3, 2011. Note that in addition to proposed commodity options rules,

    the NPRM also included proposed rules for agricultural swaps. The

    agricultural swaps rules were adopted by the Commission via a final

    rulemaking published on August 10, 2011 and are not addressed

    herein. See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011 (``Final

    Agricultural Swaps Rules'').

    \8\ See note 6, above.

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    As noted above, because the Dodd-Frank Act definition of swap

    includes commodity options, the NPRM proposed provisions that would

    substantially amend the Commission's regulations regarding such

    commodity option transactions. The proposed rules for commodity

    options, including proposed amendments to parts 3, 32, and 33,

    generally included provisions that would have subjected all commodity

    options that are swaps to the same rules applicable to any other swap.

    After thoroughly reviewing the comments submitted in response to the

    NPRM, the Commission has determined to issue the commodity options

    rules proposed in the NPRM as final rules, with certain non-substantive

    amendments, including the deletion of a ``prompt execution''

    requirement and other requirements that are no longer relevant, as well

    as minor formatting updates (e.g., renumbering). In addition, and in

    response to the commenters, this final rulemaking also includes an

    interim final rule relating to trade options, as discussed in detail

    below.

    II. Commodity Options Background

    A. Commission's Plenary Statutory Authority Over Commodity Options

    The CEA provides:

    No person shall offer to enter into, enter into or confirm the

    execution of, any transaction involving any commodity regulated

    under this chapter which is of the character of, or is commonly

    known to the trade as, an ``option'', ``privilege'', ``indemnity'',

    ``bid'', ``offer'', ``put'', ``call'', ``advance guaranty'', or

    ``decline guaranty'', contrary to any rule, regulation, or order of

    the Commission prohibiting any such transaction or allowing any such

    transaction under such terms and conditions as the Commission shall

    prescribe. Any such order, rule, or regulation may be made only

    after notice and opportunity for hearing, and the Commission may set

    different terms and conditions for different markets.\9\

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    \9\ See CEA section 4c(b), 7 U.S.C. 6c(b).

    Through this provision, Congress has given the Commission jurisdiction

    and plenary rulemaking authority over all commodity option

    transactions. Notably, while the Dodd-Frank Act included numerous

    amendments to the CEA, the plenary options authority provision in CEA

    section 4c(b) was not amended or otherwise altered by the Dodd-Frank

    Act. Rather, CEA section 4c(b) has been in the Act in substantially the

    same form since it was added by the Commodity Futures Trading

    Commission Act of 1974.\10\ The Commission has primarily used its

    options authority to promulgate the commodity options rules in parts 32

    (Regulation of Commodity Option Transactions) \11\ and 33 (Regulation

    of Domestic Exchange-Traded Commodity Option Transactions) \12\ of the

    existing regulations, as well as to support the adoption of the swaps

    rules in part 35.\13\

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    \10\ Public Law 93-463, October 23, 1974.

    \11\ 17 CFR part 32.

    \12\ 17 CFR part 33.

    \13\ 17 CFR part 35. CEA section 4c(b) was cited as one of the

    authorizing statutory provisions for original part 35, entitled

    ``Exemption of Swap Agreements.'' See Exemption of Swap Agreements,

    58 FR 5587, at 5589, Jan. 22, 1993 (noting that: ``In enacting this

    exemptive rule, the Commission is also acting under its plenary

    authority under section 4c(b) of the Act with respect to swap

    agreements that may be regarded as commodity options.''). In

    addition, when the Commission recently repealed original part 35 and

    replaced it with new part 35, entitled ``Agricultural Swaps,'' CEA

    section 4c(b) was again cited as one of the authorizing statutory

    provisions. See Final Agricultural Swaps Rules, 76 FR at 49295-

    49296, n.36, Aug. 10, 2011 (``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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    [[Page 25322]]

    B. The NPRM Proposed an Overhaul of Existing Commodity Options

    Regulations

    As explained in the introduction, the Dodd-Frank Act includes a

    definition of swap that encompasses commodity options.\14\ The

    Commission proposed the commodity options rules in the NPRM to address

    the fact that the existing rules applicable to commodity options \15\

    pre-date the Dodd-Frank Act provisions applicable to all other swaps

    and, therefore, do not consider or incorporate such provisions.\16\

    Therefore, the rules in the NPRM would have amended part 32 to

    essentially permit commodity options to trade subject to the same rules

    applicable to any other swap. The NPRM contains a detailed description

    of the historical development of part 32 and the proposed changes.\17\

    The NPRM also includes proposed updates to part 33, which currently

    applies to any option traded on a designated contract market (``DCM'')

    (whether an option on a future or an option on a physical). In order to

    place all options that are swaps under a single part of title 17 of the

    Code of Federal Regulations (``CFR''),\18\ the NPRM proposed to remove

    from part 33 any reference to an ``option on a physical,'' \19\ leaving

    part 33 applicable only to exchange-traded options on futures, and

    allowing part 32 to serve as the sole relevant regulation for all other

    commodity options (including both exchange-traded options on physical

    commodities and all off-exchange commodity options). In addition, the

    NPRM proposed repealing the swap exemption in original part 35 and

    replacing it with rules for agricultural swaps pursuant to Dodd-Frank's

    mandate that agricultural swaps only be permitted pursuant to rules set

    by the Commission.\20\

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    \14\ See note 6, above.

    \15\ Those existing rules encompassed primarily parts 32 and 33,

    but also original part 35, which was a general swap exemption

    applicable to, among other things, commodity options that did not

    qualify for the trade option exemption.

    \16\ In some cases, the pre Dodd-Frank commodity options rules

    are inconsistent with certain Dodd-Frank Act provisions, such as the

    lack of a requirement in pre Dodd-Frank Sec. 32.4 (17 CFR 32.4)

    that counterparties to trade options be eligible contract

    participants (``ECPs''). In contrast, section 2(e) of the CEA, 7

    U.S.C. 2(e), as amended by the Dodd-Frank Act, requires that

    counterparties to all swaps not conducted on or subject to the rules

    of a designated contract market be ECPs.

    \17\ See NPRM, 76 FR 6095, at 6097-6098; 6101-6103, Feb. 3,

    2011.

    \18\ The Commission's regulations are set forth in title 17 of

    the CFR.

    \19\ See NPRM, 76 FR at 6103, Feb. 3, 2011.

    \20\ See section 723(c)(3) of the Dodd-Frank Act. As explained

    in note 7, above, the proposals in the NPRM related to part 35 and

    agricultural swaps have already been adopted by the Commission as

    final rules.

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    Under the NPRM, proposed new part 32 would have governed all

    commodity options that fall under the Dodd-Frank swap definition \21\

    by permitting such commodity options to be transacted subject to the

    same laws and rules applicable to any other swap--without

    distinguishing between trade options and non-trade options. An

    additional element of new part 32, as proposed in the NRPM, was the

    elimination of the historical distinction between the treatment of

    options on the enumerated agricultural commodities and options on all

    other commodities. As proposed in the NPRM, new part 32 would treat

    options on both enumerated and non-enumerated agricultural commodities

    the same as all other commodity options. Finally, the NPRM included, at

    proposed Sec. 32.5, a grandfather clause providing that ``[n]othing

    contained in this part shall be construed to affect any lawful

    activities prior to the effective date of this part.'' That grandfather

    provision is retained unaltered in this final rule.

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    \21\ See note 6, above.

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    III. Comments on the Commodity Options Proposal in the NPRM

    A. Request for Comment on the NPRM

    In the NPRM, the Commission requested specific input on the

    following questions related to the commodity options proposal:

    Generally, will the rule changes and amendments proposed

    herein provide an appropriate regulatory framework for the transacting

    of trade options on all commodities?

    Regarding the proposed revisions to part 32, and

    specifically the revised Sec. 32.4 trade option exemption, will such

    revisions significantly affect hedging opportunities available to

    currently active users of the trade options market? In other words, is

    there any reason not to revise Sec. 32.4 as proposed? In particular,

    are there persons who offer or purchase trade options on non-enumerated

    agricultural commodities (e.g., coffee, sugar, cocoa) under current

    Sec. 32.4 who would not qualify as ECPs and would therefore be

    ineligible to participate in such options under revised Sec. 32.4? If

    so, should such participants be excepted from the general requirement

    that all swaps participants must be ECPs unless the transaction takes

    place on a DCM?

    Regarding the proposed withdrawal of Sec. 32.12 (the

    dealer option provision) in its entirety, would such action (in

    conjunction with the adoption of the new rules proposed herein)

    prejudice or otherwise harm any person, group of persons, or class of

    transactions? In other words, is there any reason not to withdraw Sec.

    32.12 as proposed?

    Similarly, and regarding the proposed withdrawal of Sec.

    32.13 (the agricultural trade option provision) in its entirety, would

    such action (in conjunction with the adoption of the new rules proposed

    herein) prejudice or otherwise harm any person, group of persons, or

    class of transactions? In other words, is there any reason not to

    withdraw Sec. 32.13 as proposed?

    Do the proposals as they relate to part 33 appropriately

    limit the scope of part 33 to DCM-traded options on futures, leaving

    DCM-traded options on physical commodities subject to part 32?

    Do the proposals outlined herein omit or fail to

    appropriately consider any other areas of concern regarding options in

    any commodity?

    B. Summary of Comments on the NPRM

    1. General Overview

    Approximately 39 comment letters were submitted that substantively

    addressed the NPRM,\22\ representing a

    [[Page 25323]]

    broad range of interests, including agricultural producers, merchants,

    SDs, commodity funds, futures industry organizations, academics and

    think tanks, a U.S. government agency, and private individuals. Twenty-

    one different commenters, through various letters, specifically

    addressed the commodity options proposal. Commodity options comments on

    the NPRM were filed by entities including: The Financial Services

    Roundtable (``FSR''); CME Group, Inc. (``CME Group'' or ``CME'');

    Futures Industry Association and International Swaps and Derivatives

    Association (``FIA & ISDA''); Edison Electric Institute and Electric

    Power Supply Association (``EIA-EPSA''); National Grain and Feed

    Association (``NGFA''); staff of the Federal Energy Regulatory

    Commission (``FERC Staff''); American Public Gas Association

    (``APGA''); Air Transport Association of America (``ATA''); Amcot;

    Coalition of Physical Energy Companies (``COPE''); Gavilon Group, LLC

    (``Gavilon''), which submitted two letters; a joint letter from

    National Rural Electric Cooperative Association, American Public Power

    Association, and Large Public Power Council (together, the ``Power

    Coalition''); Working Group of Commercial Energy Firms (``Energy

    Working Group''); Commodity Markets Council (``CMC''); Hess Corporation

    (``Hess''); a commodity options and agricultural swaps working group

    that includes Barclays Capital, Citigroup, Credit Suisse Securities

    (USA) LLC, JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo &

    Company (together, ``Commodity Options and Agricultural Swaps Working

    Group''); and American Gas Association (``AGA''). Commodity options

    comments filed on the Product Definitions NPRM included a joint letter

    from Natural Gas Supply Association and National Corn Growers

    Association (``NGSA & NCGA''); a second letter from COPE; a letter from

    Just Energy Group (``Just Energy''); a letter from American Petroleum

    Institute (``API''); a second letter from the Energy Working Group; a

    letter from BG Americas & Global LNG (``BGA''); and a second letter

    from the Power Coalition.

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    \22\ The public comment file for the NPRM is available at:

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

    This comment summary references each of the comments that

    substantively addressed the commodity options proposal in the NPRM,

    whether submitted in response to the original NPRM, in response to

    the Commission's general reopening of the comment period for

    multiple Dodd-Frank rule proposals (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

    (``Dodd-Frank General Reopening'')), or in response to the joint

    CFTC and SEC Product Definitions NPRM. Note that none of the

    comments submitted in response to Dodd-Frank General Reopening

    specifically addressed the commodity options proposal in the NPRM,

    and so they are not discussed in detail herein. In addition, certain

    comments submitted on this rulemaking may also be addressed by the

    final rule implementing the proposals in the Product Definitions

    NPRM. Finally, the public comment file for the NPRM also includes

    multiple comments that did not directly address the commodity

    options proposal (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), other comments that

    only addressed the proposed agricultural swaps rules, and four

    records of meetings or communications between Commission staff and

    interested industry groups.

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

    2. Comments on the Commodity Options Proposal

    The commodity options comments generally focused on the following

    substantive areas as they related to the commodity options proposal in

    the NPRM.

    a. Whether the Definition of Swap Includes Commodity Options

    Multiple commenters expressed the opinion that treating options as

    swaps, as set forth in the NPRM, was premature and should await the

    Commission's joint rulemaking with the SEC on the further definition of

    a swap.\23\ In particular, FIA-ISDA expressed the opinion that the

    definitions rulemaking ``is the proper place to address whether

    physical commodity options of any kind, including agricultural

    commodity options, should be treated as swaps'' and thus urged the

    Commission to defer the commodity options rulemaking until such time as

    it issues a final rulemaking further defining a swap. See FIA & ISDA at

    4. Similar sentiments were expressed by NextEra, EIA-EPSA, the Power

    Coalition, and the Energy Working Group. For example:

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    \23\ See Product Definitions NPRM, 76 FR 29818, May 23, 2011.

    The Commission notes that, where applicable, the definitions-based

    comments are also being considered in conjunction with its effort,

    jointly with the SEC, to further define certain products, including

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

    As a threshold matter, the Proposed Rule is premature insofar as

    it would treat options on physical commodities as swaps before the

    Commission has even proposed the definition of what constitutes a

    swap pursuant to Section 712(d) of the Dodd-Frank Act . * * * To

    avoid inconsistent outcomes and ensure consideration of an

    integrated and complete record on transactions to be regulated as

    swaps, the Commission should stay this proceeding insofar as it

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    would define commodity options as swaps.

    EIA-EPSA at 1-2.

    [T]he Working Group respectfully requests that the Commission

    stay the instant proceeding until such time that the mandatory final

    rule further defining the term `swap' set forth in new Section

    1a(47) of the [CEA] is jointly issued by the Commission and the

    [SEC]. Until the full scope and application of the definition of

    `swap' is known and understood, the Working Group is unable to fully

    evaluate the potential implications of the Proposed Rule, or comment

    meaningfully on how the proposed regulation of Physical Options

    could ultimately affect its members.

    Energy Working Group at 2.

    Beyond the requests to delay the commodity options final

    rulemaking, some commenters disagreed with the interpretation that the

    Dodd-Frank swap definition was intended to include all commodity

    options. The following comments illustrate this view:

    Simply put, a commodity option is not a swap * * * COPE requests

    that the Commission find that, unlike swaptions, commodity options

    are not swaps.

    COPE at 4-5.

    The text and structure of the Dodd-Frank Act indicates that

    Congress only intended to include options that require financial

    settlement and other financial products in the definition of `swap.'

    Gavilon 4/4/11 letter at 4.

    Physical Options meet the criteria of the so-called `forward

    contract exclusion' under section 1a(47)(B)(ii) of the CEA and

    therefore must be excluded from the definition of a `swap' under

    section 1a(47).

    NGSA & NCGA letter at 3.\24\ See also, letters from AGA and API.

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

    \24\ As discussed below, the NGSA & NCGA letter supported, in

    the alternative, multiple different approaches to their end goal of

    exempting or excluding physically settled commodity options from

    swap regulation.

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

    The Energy Working Group acknowledged that the swap definition

    likely included options, but argued that the Commission should take

    action to avoid that result:

    Although Congress included Physical Options in the definition of

    `swap,' it also vested the Commission with the statutory authority

    [referencing CEA section 4c(b)] to regulate options, including

    Physical Options, in a manner different than swaps. The Working

    Group's members consider Physical Options as distinct from other

    `swaps,' and more akin to physically-settled forward contracts, and

    believe that there are substantive policy reasons to treat these

    types of transactions in a similar manner. Regulating Physical

    Options as swaps under Title VII of the Act would have a substantial

    negative effect on not only the market for such options, but also

    more broadly on physical energy markets and participants in such

    markets that rely on physical energy commodities during their normal

    course of business.

    Energy Working Group at 4.

    The Energy Working Group letter went on to provide 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.'' Their letter described

    contracts called 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. See Energy Working Group at Exhibit A. APGA and ATA

    also 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. CMC requested that the Commission

    clarify that certain other types of transactions fall within the

    definition of an excluded forward contract rather than the definition

    of a swap. CMC specifically commented that cash

    [[Page 25324]]

    forward contracts with embedded options and certain cash transaction

    book-outs should not be treated as ``swaps.'' CMC at 1. 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.\25\

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

    \25\ After CFTC staff reviewed the ``options to redeem'' with

    both USDA staff members responsible for managing the cotton

    marketing loan program and industry representatives from Amcot (an

    association of US cotton marketing cooperatives), the Commission has

    concluded that the ``options to redeem'' under USDA's cotton

    marketing loan program constitute the producer's contractual right

    to repay the marketing loan and ``redeem'' the collateral (the

    cotton), to sell in the open market. As such, the ``option'' to

    redeem cotton under USDA Commodity Credit Corporation's marketing

    loan program is a standard loan repayment term and does not

    constitute a commodity option within the meaning of the CEA and CFTC

    regulations.

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

    Regarding those comments describing specific transactions, and in

    particular CMC's comments, the Commission notes that the proposed

    further definition of swap included a discussion of the applicability

    of the swap definition to both forwards with embedded options and book-

    out transactions.\26\ The Commission further notes that, in response to

    both the NPRM and the Product Definitions NPRM, several comments were

    submitted regarding ``volumetric options'' in particular (i.e.,

    optionality in a contract settling by physical delivery that is used to

    meet varying demand for a commodity). The final further definition of

    the term swap to be issued by the Commission and the SEC will address

    the applicability of the swap definition (and thus, the applicability

    of this final rule and interim final rule) to such volumetric

    options.\27\

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

    \26\ See Product Definition NPRM, 76 FR at 29827-29830, May 23,

    2011.

    \27\ See note 6, above.

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

    b. Trade Option Exemption

    While the commodity options rules proposed in the NPRM would have

    removed the trade option exemption that is currently at 17 CFR

    32.4,\28\ the vast majority of commenters who expressed an opinion on

    the topic supported retaining a trade option exemption, in one form or

    another, for options that require physical delivery if exercised, and

    were opposed to treating such options as swaps subject to all

    applicable Dodd-Frank swaps regulatory requirements. The current trade

    option exemption is an exemption from the existing prohibition against

    off-exchange commodity option transactions in 17 CFR 32.11. In

    contrast, the commenters requested a trade option exemption for the

    purpose of being exempt from (1) the swap definition, and/or (2) any

    final rules that would treat commodity options the same as any other

    swap. The following statement from Hess Corporation illustrates this

    view that certain options should not be regulated as swaps:

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

    \28\ Current 17 CFR 32.4(a) provides: ``* * * the [prohibition

    on off-exchange commodity options contained in 17 CFR 32.11] shall

    not apply to a commodity option offered by a person which has a

    reasonable basis to believe that the option is offered to a

    producer, processor, or commercial user of, or a merchant handling,

    the commodity which is the subject of the commodity option

    transaction, or the products or by-products thereof, and that such

    producer, processor, commercial user or merchant is offered or

    enters into the commodity option transaction solely for purposes

    related to its business as such.''

    Treating all options, financial and physical, as swaps will

    result in significant unintended consequences for Hess and other

    commercial entities that rely on physical options to manage their

    business risk. Hess does not believe Congress intended such a

    result. On the contrary, Hess believes that the Dodd-Frank Act

    defines `swap' in a manner that plainly distinguishes between

    financial and physical transactions. Accordingly, Hess urges the

    Commission to regulate options in a similar manner by excluding

    options that are intended to be physically settled once exercised

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

    from the definition of `swap.'

    Hess Corporation at 1. Similar sentiments were expressed by the Power

    Coalition, the Energy Working Group, Gavilon, APGA, ATA, NGSA & NCGA,

    AGA, API, and COPE. For example:

    If the Commission proposes rules to discard the `trade option

    exemption,' it should concurrently replace it with a `trade option

    exemption for nonfinancial commodities' to the defined term `swap.'

    Power Coalition at 15.

    Gavilon urges the Commission to issue an order pursuant to CEA

    Section 4c(b) that allows commercial entities to enter into Physical

    Options subject only to conditions that are comparable to the

    requirements in current Part 32.4.

    Gavilon April 4, 2011 letter at 6-7.

    [R]egulation of Physical Options as `swaps' would cause serious

    harm to the natural gas and other physical commodity markets,

    without providing significant benefits * * *. For these reasons, the

    Commission must recognize, in its final rule, either in the

    definition of a `swap' or by preserving the trade option exemption,

    that Physical Options are excluded, or are eligible for exemption,

    from regulation as swaps.

    NGSA & NCGA at 4-5.

    [I]f the Commission determines to move forward with the [Options

    NPRM], it must make clear that no physically settled agreements are

    covered [or] included in any rule pertaining to swaps.

    COPE at 5. CME expressed the opinion that ``[We believe that] Congress

    did not necessarily intend for the Commission to treat all options on

    commodities as `swaps' * * * but we have no objection to this

    outcome.'' CME at 3.

    c. Eligible Contract Participants and Trade Options

    The energy industry commenters expressed concerns regarding the

    fact that treating commodity options as swaps would require all trade

    options counterparties to be ECPs--because trade options are typically

    bilateral, off-exchange transactions, and CEA section 2(e) permits only

    ECPs to transact swaps other than on or subject to the rules of a DCM.

    The commenters noted that there are many non-ECP market participants

    who currently rely on the trade option exemption for option

    transactions in a wide range of commodities. For example:

    If the Commission eliminates the ability of the NFP Electric End

    Users to engage in energy and energy-related commodity options, or

    conditions the use of such trade options on the NFP Electric End

    Users qualifying as eligible contract participants, it will have a

    significant and detrimental effect on the NFP Electric End Users'

    ability to hedge their commercial risk in a cost effective way.

    Power Coalition at 14.

    The Commodity Options NOPR states that, `based on its review [of

    the history of the Commission's development of commodity options

    regulation], the Commission has determined that there would be

    little practical effect and no detrimental consequences in adopting

    the proposed revisions to the existing commodity options regime in

    part 32.' [citing NPRM at 76 FR 6101]. The Coalition disagrees

    strongly with the Commission's determination * * *. We consider the

    Commission's Proposed Rule to be highly detrimental to the NFP

    Electric End Users' ability to provide affordable electric energy to

    American businesses and consumers.

    Power Coalition at 16.

    Since, in general, market participants must meet certain net

    worth thresholds to qualify as an `eligible contract participant'

    [footnote omitted] and many Physical Options used by small end users

    are customized or illiquid and thus not traded on exchanges, the

    ability of small end users to transact in Physical Options would be

    limited to on-exchange contracts that do not exist or do not match

    their needs.

    NGSA & NCGA at 4.

    Similarly, the FSR pointed out, in a comment primarily addressing

    the proposed definition of ECP,\29\ that there

    [[Page 25325]]

    may be issues with the fact that the proposal in the NPRM to modify the

    trade option exemption would eliminate the availability of the trade

    option exemption for non-ECPs. See FSR at 26, n.18.

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

    \29\ 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 SEC; the comment

    period originally closed on February 22, 2011, and was extended to

    June 3, 2011).

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

    d. FERC-Regulated Transactions

    FERC Staff noted that ``depending on how broadly the term `swap' is

    construed, CFTC regulation of swaps could lead to inconsistent

    regulation of participants and transactions subject to FERC

    jurisdiction, and in particular the organized electricity markets.''

    FERC Staff at 1. The energy and electricity commenters also expressed

    concerns about the jurisdictional overlap. One commenter specifically

    noted that, ``[Physical Options] in the natural gas market are already

    subject to certain regulatory oversight by [FERC] and state public

    utility commissions with respect to price, prudence, and

    manipulation.'' NGSA & NCGA at 5.

    e. Deleting the Dealer Option Provisions

    FIA-ISDA supported the proposed withdrawal of regulation 32.12

    (pertaining to the grandfathering of certain dealer options). In

    particular, FIA-ISDA concurred with the Commission's assertion that

    ``the dealer option business has not existed since the early 1990s''

    and thus there is no longer a need for this grandfathering provision.

    See FIA-ISDA at 6.

    f. Deleting the Agricultural Trade Option Provisions

    There was only one comment related to eliminating the Agricultural

    Trade Option (ATO) Merchant provisions in part 32. Specifically, NGFA

    supported eliminating the provisions, observing:

    [NGFA] long has believed that an effective ATO regulatory

    structure could benefit agricultural producers and the

    agribusinesses with which they work to develop marketing strategies

    and market their crops. However, the rules in place have been

    unwieldy and, consequently, the ATO merchant registration regime has

    been largely unused * * *. The NGFA believes the redefinition of

    ATOs as swaps, subject to conditions under Dodd-Frank (notably the

    Eligible Contract Participant rules), will result in enhanced

    development and use of products that formerly would have been

    categorized as agricultural trade options and a broader range of

    risk management tools.

    NGFA at 2.

    g. Options Fraud Provisions

    The proposed rules for commodity options in the NPRM would have

    retained the existing enforcement provisions in part 32, i.e., Sec.

    32.8 (``Unlawful representations; execution of orders'') and Sec. 32.9

    (``Fraud in connection with commodity option transactions''). EEI-EPSA

    requested a modification of Sec. 32.9, regarding fraud in connection

    with commodity option transactions, to include a ``requisite intent''

    requirement. EEI-EPSA at 11.

    As noted above, in the final rule issued herein, the Commission is

    retaining Sec. 32.9 (``Fraud in connection with commodity option

    transactions''), which has been renumbered as Sec. 32.4, but not

    otherwise changed. The Commission is not including the requisite intent

    standard requested by EEI-EPSA, because it would narrow the scienter

    standard for fraud established by Commission precedent, which is

    ``intentionally or with reckless disregard.'' \30\ Moreover, in first

    promulgating its option fraud regulation, the Commission did ``not use

    the concept of willful behavior'' in the regulation text out of concern

    regarding the potential for courts to take a restrictive view of the

    Commission's antifraud authority.\31\ The final rule does not retain

    Sec. 32.8 (``Unlawful representations; execution of orders''). That

    provision was originally intended to apply to the retail over-the-

    counter (``OTC'') options market. Such retail OTC options transactions

    have been prohibited since the adoption of the general options

    prohibition at Sec. 32.11 in 1978.\32\ Thus Sec. 32.8 is no longer

    necessary, particularly since the violations listed in Sec. 32.8 are

    either irrelevant (in that they apply to intermediated transactions,

    whereas trade options are generally principal-to-principal

    transactions) or are subsumed by the general antifraud rule, or both.

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

    \30\ See In re Osler, CFTC Docket No. 00-5, 2001 WL 138975 (CFTC

    Feb. 15, 2001) (finding options fraud in violation of regulations

    32.9 and 33.10; ``A person acts with scienter if he acts

    intentionally, or with reckless disregard for his duties under the

    Act.'' (citing Hammond v. Smith Barney Harris Upham & Co., [1987-

    1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,617 at 36,659

    (CFTC March 1, 1990)).

    \31\ See Part 30--Fraud in Connection with Commodity

    Transactions, 40 FR 26504, at 26505 and note 2, June 24, 1975

    (adopting final rules in connection with commodity options and

    certain other transactions; ``by adopting rules patterned by

    antifraud provisions that Congress has approved as part of the

    statutory scheme of the Commodity Exchange Act [in section 4b], the

    Commission can fairly expect that the courts will adopt a consistent

    and uniform approach to the prevention of fraudulent and deceptive

    acts and practices under the Commodity Exchange Act'').

    \32\ See Suspension of the Offer and Sale of Commodity Options,

    43 FR 16153, Apr. 17, 1978.

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

    IV. Explanation of the Final Rule and Interim Final Rule for Commodity

    Options

    A. Introduction

    After considering the complete record in this matter, including all

    comments to the NPRM, the Commission is now adopting and issuing this

    final rule and interim final rule for commodity options. Broadly

    speaking, the final rule would implement the commodity option rules as

    proposed in the NPRM, whereby commodity options are permitted subject

    to the same rules as all other swaps, with additional minor revisions

    to part 32. In addition, the interim final rule includes a new trade

    option exemption from certain swaps regulations.

    B. Sections Unchanged From the NPRM

    The final rule as it relates to revisions to part 3 and to part 33

    of the Commission's regulations is the same as in the NPRM.\33\

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

    \33\ For the purposes of part 33, as amended herein, the

    Commission clarifies that an option on a futures contract is an

    option that, upon exercise, results in a futures position.

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

    C. New Part 32

    1. Final Rule

    The Commission is publishing this final rule in order to provide

    increased regulatory certainty to market participants transacting

    commodity options, along with an interim final rule to permit

    additional public comment on a new trade option exemption. The final

    rule issued herein generally adopts the commodity options proposal as

    set forth in the NPRM. That is, under this final rule, commodity

    options will be permitted to transact subject to the same rules

    applicable to any other swap. This general authorization is necessary

    because the Commission's plenary rulemaking authority over commodity

    options provides that: ``[n]o person shall offer to enter into, enter

    into or confirm the execution of, any transaction involving any

    commodity regulated under this chapter which is [a commodity option

    transaction], contrary to any rule, regulation, or order of the

    Commission prohibiting any such transaction or allowing any such

    transaction under such terms and conditions as the Commission shall

    prescribe.'' \34\ By adopting this final rule, the Commission provides

    the required general authorization for commodity options that are

    subject to the swap

    [[Page 25326]]

    definition,\35\ and removes any uncertainty as to whether CEA section

    4c(b) would otherwise prohibit such commodity options.

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

    \34\ See CEA section 4c(b).

    \35\ See note 6, above.

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

    The remainder of the final rule (i.e., everything else in new part

    32) largely tracks the commodity options language proposed in the NPRM,

    with a few minor revisions, including formatting and renumbering

    changes. For example, the final rule renumbers the sections of new part

    32 to delete (rather than reserve, as had been proposed in the NPRM)

    the provisions in existing part 32 that are being deleted. A second

    difference is that the proposal in the NRPM would have retained

    existing Sec. 32.8, entitled ``Unlawful representations; execution of

    orders,'' while this final rule deletes that provision, as discussed

    above. Moreover, this commodity options final rule retains the strong

    options antifraud language that was proposed in the NPRM at Sec. 32.9

    (now renumbered as Sec. 32.4).\36\ In addition, the general commodity

    options authorization, proposed as Sec. 32.4 and renumbered herein as

    Sec. 32.2, has been reformatted and updated to include a reference to

    the interim final rule, i.e., the new Sec. 32.3 trade option

    exemption, which is described in detail, below.

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

    \36\ This provision is the same antifraud language used in part

    32 prior to the adoption of this final rule and interim final rule.

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

    2. Interim Final Rule; Trade Option Exemption

    a. Exemption From General Swaps Rules

    The interim final rule incorporates a new Sec. 32.3 into part 32,

    providing an exemption from certain swaps regulations for trade options

    on exempt and agricultural commodities as between certain commercial

    and sophisticated counterparties. This trade option exemption will

    operate as an alternative to the general commodity options

    authorization in Sec. 32.2. Pursuant to the trade option exemption

    issued as an interim final rule herein, if the offeror,\37\ the

    offeree,\38\ and the characteristics of the option transaction meet the

    requirements of the trade option exemption, such option transaction

    will be exempt from the general Dodd-Frank swaps regime,\39\ subject to

    specified ongoing conditions and compliance requirements discussed

    below, as applicable.

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

    \37\ The offeror, sometimes also called the grantor, is the

    seller of a commodity option.

    \38\ The offeree, sometimes also called the grantee, is the

    buyer of a commodity option.

    \39\ For example: Trade options would not contribute to, or be a

    factor in, the determination of whether a market participant is an

    SD or MSP; trade options would be exempt from the rules on mandatory

    clearing; and trade options would be exempt from the rules related

    to real-time reporting of swaps transactions. The provisions

    identified in this footnote are not intended to constitute an

    exclusive or exhaustive list of the swaps requirements from which

    trade options are exempt.

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

    b. Offeror

    Under the terms of the interim final rule, the offeror must fall

    into one of two categories. The offeror may be an ECP, which assures

    that option grantors will have some minimal level of financial

    resources and sophistication in order to minimize the risk that a

    seller would not be able to perform its obligations under a commodity

    option.\40\ Alternatively, the offeror may be a producer, processor, or

    commercial user of, or a merchant handling the commodity which is the

    subject of the commodity option transaction, or the products or by-

    products thereof, and be offering or entering into the transaction

    solely for purposes related to its business as such. Because the trade

    option exemption generally is intended to permit parties to hedge or

    otherwise enter into transactions for commercial purposes, and because

    certain commercial parties prefer to transact primarily with other

    commercial parties, the trade option exemption set forth in the interim

    final rule specifically authorizes commercials who may not be ECPs to

    act as trade option offerors. In either instance, the trade option

    offeror may only offer or enter into the contract if it reasonably

    believes, consistent with the standard in the existing trade option

    exemption, that the offeree meets the offeree requirements specified

    below.

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

    \40\ The existing trade option exemption, which the interim

    final rule trade option exemption would replace, includes no

    standards or requirements for option offerors.

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

    c. Offeree

    The offeree must meet the same basic requirements as under the

    existing trade option exemption. That is, the option buyer must be a

    producer, processor, or commercial user of, or a merchant handling the

    commodity which is the subject of the commodity option transaction, or

    the products or by-products thereof, and be entering into the

    transaction solely for purposes related to its business as such. Note

    that there is no ECP requirement or other financial eligibility

    standard for the offeree. The purpose of requiring the trade option

    buyer to be a commercial, and of not imposing an ECP or other financial

    eligibility standard, is to ensure that hedging opportunities for

    commercial entities, for physically delivered transactions used for

    purposes related to their business as such, remain available regardless

    of the size or sophistication of the commercial entity.

    d. Physical Commodity Option

    The third element of the trade option exemption is that both

    parties must intend that the commodity option be physically settled, so

    that, if exercised, the option would result in the sale of an exempt or

    agricultural (i.e., non-financial) commodity for immediate (spot) \41\

    or deferred (forward) shipment or delivery. To assist parties in

    determining whether the sale of the exempt or agricultural commodity is

    intended to be physically settled, the Commission refers parties to the

    forward contract exclusion guidance as provided in the Product

    Definition NPRM,\42\ or such other guidance as ultimately may be

    adopted in the final product definition rulemaking. That is, to the

    extent the obligations that remain (or are created) upon the exercise

    of a commodity option are spot transactions or fall within the forward

    contract exclusion from the swap definition, such commodity option is

    eligible for the trade option exemption.

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

    \41\ If not specified by law (see, e.g., CEA section

    2(c)(2)(C)(i)(II)(bb)(AA), 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA)) or

    cash market practice, to be a spot transaction, rather than a

    forward transaction, delivery must occur ``within a reasonable time

    [after the contract is executed] in accordance with prevailing cash

    market practice.'' Regulation of Noncompetitive Transactions

    Executed on or Subject to the Rules of a Contract Market, 63 FR

    3708, 3711, Jan. 26, 1998 (concept release). Delivery under a spot

    contract usually occurs within a few days of the trade date. See

    CFTC Interpretative Letter 98-73, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/98-73.pdf

    (October 1998), stating that ``[i]n a spot transaction, immediate

    delivery of the product and immediate payment for the products are

    expected on or within a few days of the trade date'' and citing CFTC

    Interpretative Letter No. 97-01, 1996-98 Transfer Binder Comm. Fut.

    L. Rep. (CCH) ] 26,937 at p. 44,520 (December 12, 1996), in turn

    citing Timothy J. Snider, Regulation of the Commodities Futures and

    Options Markets, Vol. 1, Sec. 9.01 (2ed. 1995). However, under cash

    market practices in some markets, delivery can occur more than a few

    days after the trade date. See CFTC, Division of Trade and Markets:

    Report on Exchange of Futures for Physicals 51, 65, 124-147 (1987)

    (noting that under then-prevailing cash market practices,

    transactions in crude oil and sugar called for delivery in 30 and 75

    days, respectively, while foreign currency spot transactions settled

    in 2 days).

    \42\ See Product Definition NPRM, 76 FR at 29827-29830, May 23,

    2011.

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

    e. Trade Option Exemption Conditions

    While the trade option exemption issued herein would operate as a

    general exemption from the rules otherwise applicable to other swaps

    (i.e., the Dodd-Frank swaps regime), the trade option exemption is

    subject to certain

    [[Page 25327]]

    conditions. The conditions are primarily intended to preserve a level

    of market visibility for the Commission while reducing the regulatory

    compliance burden for market participants.

    i. Recordkeeping Pursuant to Part 45

    These conditions include a recordkeeping requirement for any trade

    options activity, i.e., the recordkeeping requirements of 17 CFR

    45.2.\43\ Such records must be maintained by all trade option

    participants pursuant to Sec. 45.2 and made available to the

    Commission as specified therein.\44\ Section 45.2 applies different

    recordkeeping requirements, depending on the nature of the

    counterparty. For example, if a trade option counterparty is an SD or

    MSP, it would be subject to the provisions of Sec. 45.2(a). If a

    counterparty is neither an SD nor an MSP, it would be subject to the

    less stringent recordkeeping requirements of Sec. 45.2(b). This

    recordkeeping condition will ensure that trade options market

    participants are able to provide pertinent information regarding their

    trade options activity to the Commission, if requested.

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

    \43\ The Commission recently adopted final swap data

    recordkeeping rules. See Swap Data Recordkeeping and Reporting

    Requirements 77 FR 2136, at 2198, Jan. 13, 2012.

    \44\ 17 CFR 45.2(h) provides that: [a]ll records required to be

    kept pursuant to this section [17 CFR 45.2] by any registrant or its

    affiliates or by any non-SD/MSP counterparty subject to the

    jurisdiction of the Commission shall be open to inspection upon

    request by any representative of the Commission, the United States

    Department of Justice, or the [SEC], or by any representative of a

    prudential regulator as authorized by the Commission. Copies of all

    such records shall be provided, at the expense of the entity or

    person required to keep the record, to any representative of the

    Commission upon request. Copies of records required to be kept by

    any registrant shall be provided either by electronic means, in hard

    copy, or both, as requested by the Commission, with the sole

    exception that copies of records originally created and exclusively

    maintained in paper form may be provided in hard copy only. Copies

    of records required to be kept by any non-SD/MSP counterparty

    subject to the jurisdiction of the Commission that is not a

    Commission registrant shall be provided in the form, whether

    electronic or paper, in which the records are kept.

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

    ii. Reporting Pursuant to Part 45

    In addition to part 45 recordkeeping (which applies in some form to

    all trade options and trade option participants), the interim final

    rule requires certain trade options to be reported pursuant to part

    45's reporting provisions. Under the interim final rule, the

    determination as to whether a trade option is required to be reported

    pursuant to part 45 is based on the parties to the trade option and

    whether or not they have previously reported swaps pursuant to part 45.

    Specifically, if any trade option involves at least one counterparty

    (whether as buyer or seller) that has (1) Become obligated to comply

    with the reporting requirements of part 45, (2) as a reporting party,

    (3) during the twelve month period preceding the date on which the

    trade option is entered into, (4) in connection with any non-trade

    option swap trading activity, then such trade option must also be

    reported pursuant to the reporting requirements of part 45. If only one

    counterparty to a trade option has previously complied with the part 45

    reporting provisions, as described above, then that counterparty shall

    be the part 45 reporting entity for the trade option. If both

    counterparties have previously complied with the part 45 reporting

    provisions, as described above, then the part 45 rules for determining

    the reporting party will apply.\45\

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

    \45\ See 17 CFR 45.8.

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

    By applying the part 45 reporting requirements to trade options in

    this manner, the Commission will obtain greater transparency and

    improved oversight of the swaps markets, both of which are primary

    statutory objectives of Title VII of the Dodd-Frank Act. The Commission

    believes, however, that greater transparency regarding the trade

    options market must be balanced against the burdens of frequent and

    near-instantaneous reporting required under part 45 of the Commission's

    regulations on counterparties who are not otherwise obligated to report

    because they do not have other reportable swap activity. Accordingly,

    if neither counterparty to a trade option already is complying with the

    reporting requirements of part 45 as a reporting party in connection

    with its non-trade option swap trading activities as described

    above,\46\ then such trade option is not required to be reported

    pursuant to the reporting requirements of part 45.\47\

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

    \46\ That is, neither counterparty to the trade option has

    previously reported, as the reporting party, non-trade option swap

    trading activity during the twelve months preceding the date on

    which the trade option is entered into.

    \47\ By taking this approach, the Commission ensures that no

    market participant is compelled to comply with part 45's reporting

    requirements based solely on its trade options activity.

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

    iii. Annual Notice Filing Alternative to Part 45 Reporting; Form TO

    To the extent that neither counterparty to a trade option has

    previously submitted reports to an SDR as a result of its swap trading

    activities as described above, the Commission recognizes that requiring

    these entities to report trade options to an SDR under part 45 of the

    Commission's regulations solely with respect to their trade options

    activity would be costly and time consuming. As an alternative, the

    interim final rule requires any counterparty to an otherwise unreported

    trade option to submit an annual filing to the Commission for the

    purpose of providing notice that it has entered into one or more

    unreported trade options in the prior calendar year. Unlike with trade

    options subject to the part 45 reporting requirement, wherein only one

    counterparty to the trade option reports the transaction to an SDR, the

    notice filing requirement applies to both counterparties to an

    unreported trade option. Because the purpose of the notice filing

    requirement is to identify to the Commission those market participants

    engaging in unreported trade options, the notice filing requirement

    applies whether or not such counterparty has also been a non-reporting

    counterparty to a reported trade option in the twelve months preceding

    the date on which the unreported trade option was entered into. Market

    participants will satisfy the annual notice filing requirement by

    completing and submitting a new Commission form, Form TO, by March 1

    following the end of any calendar year during which the market

    participant entered into one or more unreported trade options.

    Form TO requires an unreported trade option counterparty to: (1)

    Provide name and contact information, (2) identify the categories of

    commodities (agricultural metals, energy, or other) underlying one or

    more unreported trade options which it entered into during the prior

    calendar year, and (3) for each commodity category, identify the

    approximate aggregate value of the underlying physical commodities that

    it either delivered or received in connection with the exercise of

    unreported trade options during the prior calendar year. For the

    purposes of item (3), a reporting counterparty should not include the

    value of commodities that were the subject of trade options that

    remained open at the end of the calendar year or any trade options that

    expired unexercised during the prior calendar year.

    Pursuant to the interim final rule, Form TO is an annual filing

    requirement. The form must be submitted to the Commission no later than

    March 1 for the prior calendar year. For example, if a market

    participant enters into one or more unreported trade options between

    January 1, 2013 and December 31, 2013 (as will be discussed in the

    effective date and compliance date discussion, below, the first

    calendar year for which a Form TO will be due to the Commission is

    2013), the

    [[Page 25328]]

    market participant must submit a completed Form TO to the Commission on

    or before March 1, 2014. Form TO is set out in appendix A to part 32 of

    the Commission's regulations and will be available electronically on

    the Commission's Web site at least ninety days before the first

    compliance date for filing of that form, March 1, 2014. The Form TO

    filing requirement will provide the Commission a minimally intrusive

    level of visibility into the unreported trade options market, will

    guide the Commission's efforts to collect additional information

    through its authority to obtain copies of books or records required to

    be kept pursuant to the Act \48\ should market circumstances dictate,

    and will enable the Commission to determine whether these

    counterparties should be subject to more frequent and comprehensive

    reporting obligations in the future.

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

    \48\ See 17 CFR 1.31(a)(2) and 17 CFR 45.2(h).

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

    iv. Specific Request for Comment on Trade Option Reporting and/or

    Notice Filing Requirements

    The Commission is specifically requesting comment on including

    these part 45 recordkeeping and reporting compliance conditions, and

    the Form TO filing requirement for counterparties to unreported trade

    options, in connection with the interim final rule's trade option

    exemption. For example, what are the trade-offs between (1) reducing or

    removing the reporting requirement and/or notice filing requirement

    (and attendant costs) for smaller end-user and commercial entities and

    (2) the Commission's goals of maintaining market visibility and

    eliminating incentives or opportunities to avoid regulation? In their

    comments, market participants should identify alternatives, if any, to

    the part 45 recordkeeping and reporting requirements and/or the Form TO

    filing requirement as applicable to trade options participants.

    Commenters should explain how such alternatives may be able to provide

    the Commission with the equivalent market information and visibility it

    would receive pursuant to the part 45 requirements and/or the Form TO

    filing requirement, as applicable under the interim final rule, while

    lowering the compliance burden on market participants.

    v. Swaps Large Trader Reporting; Position Limits

    The interim final rule's trade option exemption also includes

    certain conditions referencing various other swaps rules, which rules

    shall remain applicable to trade options under this interim final rule.

    Specifically, the following conditions, as set forth in interim final

    rule Sec. 32.3(c), would apply to trade options (and trade option

    participants) to the same extent that such conditions would apply to

    any other swap (and swap counterparty): (1) Large trader reporting

    under part 20 (i.e., reporting entities under part 20--SDs and clearing

    members--must consider their counterparty's trade option positions just

    as they would consider any other swap position for the purpose of

    determining whether a particular counterparty has a consolidated

    account with a reportable position, as set forth therein); \49\ and (2)

    position limits under part 151 (to the extent a trade option position

    would otherwise be subject to the position limit rules).\50\

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

    \49\ 17 CFR part 20. Note that swap large trader reporting

    obligations apply only to SDs and clearing members. Trade option

    sellers and buyers (unless they fall within one of the part 20

    reporting party categories) would not be responsible for filing

    large trader reports.

    \50\ 17 CFR part 151. Note that position limits apply only to

    speculative positions in those referenced contracts specified in

    part 151. Trade options, which are commonly used as hedging

    instruments or in connection with some commercial function, would

    normally qualify as hedges, exempt from the speculative position

    limit rules.

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

    vi. SD/MSP Conditions

    In addition, Sec. 32.3(c) provides that certain provisions of

    subpart F and subpart J of part 23, relating to recordkeeping,

    reporting, and risk management duties of SDs and MSPs would apply to

    trade options.\51\ SDs and MSPs participating in trade options will

    also remain subject to CEA section 4s(e), which addresses capital and

    margin requirements for SDs and MSPs. Each of these SD and MSP

    conditions simply confirms that an SD and/or MSP may not avoid certain

    requirements or obligations by structuring its swap transactions as

    trade options. SDs and MSPs may participate in trade options when they

    meet the underlying trade option offeror or offeree eligibility

    requirements, as applicable. But they will remain subject to the SD/MSP

    conditions identified in the interim final rule. As with the part 20

    and part 151 conditions applicable to all trade options and trade

    options participants, the SD/MSP conditions only apply in the context

    of trade options to the extent they would otherwise apply to the

    transaction as any other kind of swap (i.e., as a non-trade option).

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

    \51\ Swap Dealer and Major Swap Participant Recordkeeping and

    Reporting, Duties, and Conflicts of Interest Policies and

    Procedures; Futures Commission Merchant and Introducing Broker

    Conflicts of Interest Policies and Procedures; Swap Dealer, Major

    Swap Participant, and Futures Commission Merchant Chief Compliance

    Officer, 77 FR 20128, Apr. 3, 2012. Note that these part 23

    provisions, like the part 20 provisions, would only apply to certain

    large sophisticated entities--in this case, SDs and MSPs.

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

    vii. Enforcement Provisions

    Finally, at Sec. 32.3(d), the interim final rule also retains for

    trade options the antifraud and anti-manipulation rules under part

    180,\52\ Sec. 23.410,\53\ the specific options antifraud provisions of

    pre-Dodd-Frank Sec. 32.9 (renumbered herein as Sec. 32.4), and any

    other general antifraud, anti-manipulation, and enforcement provisions

    of the CEA, including but not limited to, CEA sections 2, 4b, 4c, 4o,

    4s(h)(1)(A), 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.

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

    \52\ 17 CFR part 180.

    \53\ 17 CFR 23.410.

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

    viii. General Exemptive Authority Retained

    The trade option exemption also contains general exemptive language

    that would permit the Commission, upon written request or upon its own

    motion, to exempt any other person, either unconditionally or on a

    temporary or other conditional basis, from any provisions of part 32

    (other than the antifraud, anti-manipulation, and enforcement rules),

    or from the provisions of the Act, including any Commission rule,

    regulation, or order thereunder, otherwise applicable to any other

    swap, if the Commission finds, in its discretion, that it would not be

    contrary to the public interest to grant such exemption. This

    supplemental language tracks the general exemptive provision in the

    existing trade option exemption, and it will provide the Commission

    with the flexibility to receive and consider any concerns from market

    participants regarding the scope or implementation of the interim final

    rule trade option exemption.

    D. Effective Date; Compliance Date

    The commodity options final rule and interim final rule issued

    herein shall become effective 60 days after the publication of this

    document in the Federal Register.

    The compliance date for the final rule and the interim final rule

    shall be 60 days after the term ``swap'' is further defined pursuant to

    section 721 of the Dodd-Frank Act (i.e., 60 days after the further

    definition of ``swap'' is adopted by the Commission and the SEC and

    published in the Federal Register). However, for the purpose of

    complying with (1) final rule Sec. 32.2(a), which permits entering

    into commodity options transactions in compliance with

    [[Page 25329]]

    and subject to the provisions of the Act, including any Commission

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

    other swap, and (2) the conditions and provisions of the interim final

    rule trade option exemption under Sec. 32.3, the compliance date for

    this final rule and interim final rule shall be the compliance date

    associated with any such swaps rules. That is, notwithstanding the

    effective or compliance dates identified herein, commodity options

    market participants need not comply with any applicable condition

    referencing a swap rule, regulation, or order, until such time as the

    rule, regulation, or order is applicable to any other swap. In

    addition, the first relevant compliance date for the Form TO notice

    filing requirement will be for the calendar year beginning January 1,

    2013. That is, counterparties to unreported trade options are required

    to submit a Form TO in connection with their unreported trade options

    entered into between January 1 and December 31, 2013 on or before March

    1, 2014. There is no Form TO filing requirement for unreported trade

    options entered into between the effective date of this rule and

    December 31, 2012.

    V. Interim Final Rule Matters

    This document implements regulations addressing the inclusion of

    commodity options in the Dodd-Frank Act definition of ``swap.'' Section

    721 of the Dodd-Frank Act defines the term ``swap'' to include an

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

    value, of one or more commodities. The existing trade option exemption

    exempts certain trade options from the CEA almost entirely and was

    enacted pursuant to section 4c(b) of the CEA, which provides the CFTC

    with plenary authority to issue regulations related to commodity

    options. Such authority was not amended by the Dodd-Frank Act, and

    therefore, Congress continues to vest the Commission with plenary

    authority over commodity options. Prior to the Dodd-Frank Act, CFTC

    regulations provided for a trade option exemption, permitting the

    trading of qualifying transactions subject only to antifraud, anti-

    manipulation, and enforcement rules.\54\ As discussed above, the Dodd-

    Frank Act defined commodity options as swaps. Accordingly, the CFTC

    proposed to amend the commodity options rules generally, and to

    specifically withdraw the trade option exemption, thereby providing

    that commodity options could transact subject to the same laws, rules,

    regulations, and orders otherwise applicable to all other swaps,

    consistent with the Dodd-Frank Act. As explained in the comment summary

    above, the proposal requested comment regarding trade options and

    multiple commenters requested that the CFTC retain some form of a trade

    option exemption, particularly for physically delivered options.

    Therefore, in response to comments, and pursuant to its plenary

    authority over commodity options, the CFTC is implementing a revised

    trade option exemption, with certain conditions described above,

    through this interim final rule.

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

    \54\ See prior 17 CFR 32.4.

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

    The CFTC nevertheless invites comments on this interim final rule

    and, when assessing whether to amend the interim final trade option

    exemption, will consider all timely comments submitted during the

    public comment period as described in the following section.

    VI. Request for Comment on Interim Final Rule

    In connection with the interim final rule's trade option exemption

    in Sec. 32.3 adopted herein, the Commission requests comment on the

    following questions:

    1. Generally, does the interim final rule issued herein provide an

    appropriate regulatory framework for trade options?

    2. Regarding the trade option exemption, will such provision

    preserve appropriate hedging opportunities for current users of the

    trade options market? Is there any reason not to retain the trade

    option exemption as issued herein?

    a. What types of entities offer trade options pursuant to the

    existing trade option exemption? Is the scope of the trade option

    exemption offeror requirement in the interim final rule (i.e., offerors

    must be ECPs or commercials) appropriate? Alternatively, is this

    offeror requirement either too broad or too narrow?

    b. Is the scope of the trade option exemption offeree requirement

    in the interim final rule (i.e., offerees must be commercials)

    appropriate? Alternatively, is this offeree requirement either too

    broad or too narrow? Should ECPs that are not commercials be permitted

    as offerees? Why or why not?

    c. Is the list of commercials described in the interim final rule

    (i.e., a producer, processor, or commercial user of, or a merchant

    handling the commodity that is the subject of the commodity option

    transaction, or the products or by-products thereof) appropriate?

    Alternatively, is this description of commercials either too broad or

    too narrow?

    d. Is the range of commodity option transactions that would qualify

    for the trade option exemption appropriate?

    i. By requiring that a trade option, when exercised, must result in

    the immediate (spot) or deferred (forward) shipment or delivery of an

    exempt or agricultural commodity, would the interim final rule

    improperly exclude other commodity option transactions, including other

    transactions with optionality, that should be eligible for a trade

    option exemption?

    ii. In the alternative, is this physical delivery requirement of

    the trade option exemption too broad?

    e. Should the interim final rule retain the general exemptive

    authority at Sec. 32.3(e)?

    f. In connection with Sec. 32.3:

    i. Is the requirement to comply with the part 45 recordkeeping

    rules for all trade option participants appropriate?

    ii. Is the requirement that certain trade options be reported

    pursuant to the reporting provisions of part 45 appropriate?

    1. Alternatively, should there be a de minimis threshold below

    which part 45 reporting would not apply to a trade option transaction

    and its participants (unless they are SDs/MSPs)?

    2. If the response to the foregoing question is yes, should the de

    minimis threshold be based on the underlying transactions (volume,

    value, or some other measure), the participant characteristics, both,

    or some other measure? Where practicable, please identify a specific

    level at which a de minimis threshold may be set.

    iii. In Sec. 32.3(b)(1)(i), the Commission provides that trade

    options reporting for commodity options is required for counterparties

    that have become obligated to comply with the reporting requirements of

    part 45. The Commission understands that in some circumstances a

    counterparty that transacts trade options may not, itself, be obligated

    to report under part 45, but may be affiliated, at the enterprise or

    group level, with another entity that complies with part 45. There may

    be circumstances, therefore, where the obligation to report trade

    options would be more appropriately based on trade options activity and

    part 45 reporting at the enterprise or group level.

    1. How often do cases occur in which a person that is subject to

    part 45 receives, in the ordinary course of business, transaction-level

    trade options information from a trade option counterparty affiliate

    that is not subject to part 45?

    [[Page 25330]]

    2. Should Sec. 32.3(b)(1) be revised to account for such

    situations and, if so, how? \55\

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

    \55\ For example, should the requirement in Sec. 32.3(b)(1)(i)

    to report trade options extend to trade options counterparties that

    have become obligated to comply with the reporting requirements of

    part 45, or are affiliated with a person that is required to comply

    with the reporting requirements of part 45, provided that such an

    affiliate obtains through the ordinary course of business

    transaction-level information on the trade options entered into by

    the counterparty? An ``affiliate'' is a person that is either

    commonly owned or commonly controlled, consistent with existing CFTC

    affiliate rules. Two persons would be commonly owned affiliates if

    one party directly or indirectly holds a majority ownership interest

    in the other, or if a third party directly or indirectly holds a

    majority interest in both, based on holding a majority of the equity

    securities of an entity, or the right to receive upon dissolution

    the contribution of a majority of the capital of a partnership. Two

    persons are commonly controlled affiliates if either (1) one person

    possesses the power, directly or indirectly, to direct or cause the

    direction of the management and policies of the other person whether

    through the ownership of voting securities, by contract or otherwise

    or (2) a third person possesses the power, directly or indirectly,

    to direct or cause the direction of the management and policies of

    both persons whether through the ownership of voting securities, by

    contract or otherwise.

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

    iv. Is the requirement that counterparties to unreported trade

    options submit an annual notice filing, via Form TO, for the purpose of

    notifying the Commission that such counterparty entered into one or

    more unreported trade in the prior calendar year appropriate?

    1. Alternatively, should these trade options be reported pursuant

    to part 45, notwithstanding that these counterparties do not otherwise

    comply with those requirements in connection with their swap trading

    activities? What would be the costs and benefits of this alternative

    condition? Please provide data and estimates to support your comments.

    2. Should Form TO be required to be submitted more often (e.g.,

    quarterly or monthly) and/or to require additional data fields (e.g.,

    expired and/or open trade options and transaction specific data for

    each unreported trade option)? What would be the costs associated with

    requiring more frequent and/or more detailed filings? Please provide

    data and estimates to support your comments.

    v. Is the swaps large trader reporting condition (part 20)

    appropriate for the trade option exemption?

    vi. Is the position limit condition (part 151) appropriate for the

    trade option exemption?

    vii. Are the SD and MSP recordkeeping, reporting, and risk

    management conditions, as applied via part 23, appropriate for SDs and

    MSPs transacting under the trade option exemption?

    viii. Is the condition retaining the applicability of CEA section

    4s(e) (Capital and Margin Requirements for SDs and MSPs) appropriate?

    ix. Are the antifraud, anti-manipulation, and enforcement related

    conditions appropriate for the trade option exemption?

    x. Since trade options have to be physically delivered and may only

    be offered to commercials for use in their business as such, does it

    makes sense to exclude trade options from the calculation of whether or

    not a market participant is required to register as an SD or MSP?

    Alternatively, is there any reason to include trade options in the

    calculation of whether or not a market participant is required to

    register as an SD or MSP?

    3. Does the interim final rule issued herein omit or fail to

    appropriately consider any other areas of concern regarding commodity

    options?

    4. The Commission also invites comments on the costs and benefits

    considerations of the interim final rule under CEA section 15a, below.

    The Commission specifically requests that commenters quantify the costs

    and benefits, where practical.

    Comments on these questions and the interim final rule must be

    submitted to the Commission, pursuant to the instructions provided

    above, on or before June 26, 2012.

    VII. Related Matters

    A. Cost Benefit Considerations

    1. Background

    Prior to the passage of the Dodd-Frank Act, the Commission's

    regulations permitted certain commodity option transactions, including

    ``trade options.'' As described above and in the NPRM, trade options

    are used by commercial entities entering into the commodity option

    transactions solely for purposes related to their business involving

    the commodity.\56\ Buyers and sellers of trade options transact

    bilaterally off-exchange.\57\

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

    \56\ 76 FR 6095, 6102, Feb. 3, 2011 (citing 17 CFR 32.4(a),

    which exempts a commodity option when it is offered to ``a producer,

    processor, or commercial user of, or a merchant handling, the

    commodity which is the subject of the commodity option transaction,

    or the products or by-products thereof, and that such producer,

    processor, commercial user or merchant is offered or enters into the

    commodity option transaction solely for purposes related to its

    business as such'').

    \57\ See 17 CFR 32.4. See also 17 CFR part 35 as in effect prior

    to December 31, 2011. In addition, there was a stand-alone

    regulatory regime for agricultural trade options set forth in pre

    Dodd-Frank 17 CFR 32.13.

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

    Under the pre-Dodd-Frank regulatory construct, neither the buyer

    nor the seller of a commodity trade option were required to register

    with the Commission, maintain books and records, or report their

    transactions to the Commission in connection with their trade options

    activity. As a result, the current trade option market is opaque,

    affording virtually no regulatory visibility into its composition and

    scope.\58\

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

    \58\ As discussed further below, as a consequence, the

    Commission is without reliable data from which to assess the size of

    the commodity options market or the number or types of market

    participants in it, which in turn makes quantification of the costs

    and benefits of this rulemaking largely impracticable.

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

    Congress altered the foundation for this regulatory construct in

    passing the Dodd-Frank Act, by, among other things, determining that

    the definition of ``swap'' would include, among other products,

    commodity options. Section 721 of the Dodd-Frank Act added section

    1a(47) to the CEA, defining ``swap'' to include not only ``any

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

    things, ``a commodity swap,'' but also ``[an] option of any kind that

    is for the purchase or sale, or based on the value, of 1 or more * * *

    commodities * * *.'' \59\ In addition, the Dodd-Frank Act mandated

    substantial changes in the swaps regulatory regime to reduce risk,

    increase transparency, and promote market integrity within the

    financial system.

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

    \59\ Section 1(a)(47) specifically excludes from the definition

    of ``swap'' any option on a contract of sale of a commodity for

    future delivery (i.e., options on futures traded on designated

    contract markets). See CEA section 1(a)(47)(B)(i).

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

    This legislative act implicitly required the Commission to revisit

    its historical treatment of commodity options, including trade options.

    In so doing, the Commission is mindful that one of the purposes of the

    Dodd-Frank Act is to increase transparency of the financial markets,

    including the commodity options markets.

    In response to the Dodd-Frank Act's definition of ``swap'' to

    include options, on February 3, 2011, the Commission published in the

    Federal Register a Notice of Proposed Rulemaking (``NPRM'') that

    proposed to treat all commodity options (other than options on futures)

    as swaps. In the NPRM, the Commission proposed to require that all such

    commodity option transactions, including trade options, comply with the

    requirements that apply to swaps generally. While the NPRM received

    significant public comment, no commenter provided any quantitative data

    on costs or benefits.

    Comments to the NPRM from the Energy Working Group typified

    commenters' concern that treating options on physical commodities like

    [[Page 25331]]

    any other swaps would impose significant costs:

    Treating Physical Options transacted in such markets as

    ``swaps'' would create uncertainty and impose costly and duplicative

    regulatory requirements.\60\

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

    \60\ Energy Working Group at 2.

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

    [T]he Working Group sees no reason the Commission should not

    continue to treat Physical Options entered into by a commercial

    entity as commercial transactions exempt from the majority of the

    provisions of the CEA.\61\

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

    \61\ Energy Working group at 11.

    And in specific response to the NPRM's removal of the trade option

    exemption provided for in pre-Dodd-Frank Sec. 32.4 of the Commission's

    regulations, commenters urged the Commission to reconsider, as

    exemplified by the following comments from APGA and EEI-EPSA,

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

    respectively:

    Although the Commission concludes that removal of the trade

    option exemption will have limited impact on market participants

    because of the swap end-user exemption, the regulatory requirements

    which would apply if these cash contracts are treated as though they

    are options would be enormous. First, characterizing these contracts

    as options would require compliance with all of the swap rules,

    including possibly requiring a natural gas producer whose only

    business is selling the physical product to register as a swap

    dealer.\62\

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

    \62\ APGA at 4.

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

    Regulations that make effective risk management tools and

    physical supply more costly for end-users of swaps and commodity

    options will result in higher and more volatile energy prices for

    retail, commercial, and industrial customers.\63\

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

    \63\ EEI-EPSA at 3.

    The Commission also received specific comments requesting a trade

    option exemption for options that, if exercised, result in physical

    delivery.\64\ Commenters also explained the need to retain a trade

    option exemption in the context of agricultural trade options.\65\

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

    \64\ EEI-EPSA at 7-8.

    \65\ Commodity Options and Agricultural Swaps Working Group at

    3-4.

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

    In this final rulemaking, the Commission is repealing and replacing

    the Commission's regulations concerning commodity options. Upon

    consideration of the comments to the NPRM, the Commission also is

    adopting an interim final rule that incorporates an exemption for

    ``trade options.''

    In the discussion that follows, the Commission considers the costs

    and benefits of, and alternatives to, amending the regulations

    applicable to commodity options, including the trade option exemption

    that makes up the interim final rule, Sec. 32.3; this interim final

    rule, the Sec. 32.3 trade option exemption, will operate as an

    alternative to the general commodity options authorization in Sec.

    32.2. The Commission considers these costs and benefits of its actions

    in the discussion that follows.

    2. Statutory Mandate To Consider the Costs and Benefits of the

    Commission's Action: CEA Section 15(a)

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

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing certain orders. Section 15(a) further

    specifies that the costs and benefits shall be evaluated in light of

    the following 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 considers the costs and

    benefits resulting from its own discretionary determinations with

    respect to the section 15(a) factors.

    The costs and benefits associated with the inclusion of commodity

    options in the definition of swap in the Dodd-Frank Act are

    attributable to Congress, and therefore beyond the scope of the

    consideration of costs and benefits required by CEA section 15(a). The

    Commission considers the costs and benefits attributable to its actions

    in this rulemaking against the basic framework provided by the

    statute--in which options are swaps subject to all of the requirements

    attendant to that definition under the Dodd-Frank Act and the CEA (as

    amended by Dodd-Frank Act).

    In proposing the rules, the Commission requested comment on all

    aspects of its cost benefit analysis, including the identification and

    assessment of any costs and benefits not discussed in our analysis, and

    data relevant to these costs and benefits. Several commenters provided

    comments on the costs and benefits of the proposal in qualitative

    terms, but none provided data from which to quantify costs and

    benefits.

    The opacity with which trade options historically have been

    transacted affords the Commission no meaningful visibility with respect

    to the composition and scope of trade option activities necessary to

    quantify costs and benefits of this rulemaking. The lack of

    quantification in comments reinforces this conclusion and further

    demonstrates that there is no reasoned basis for determining how many

    commercials engage in commodity options or, more specifically, trade

    options. In other words, there is no reliable information from which to

    assess the number of commercials that transact in commodity options

    today, or will do so in the future. There is also no way determine the

    number or type of entities that would choose to avail themselves of the

    trade option exemption that is the subject of this interim final rule.

    Notwithstanding these limitations, based on the comments received, it

    is apparent that commercials place great importance on the continued

    availability of a trade option exemption.

    3. Benefits and Costs of the Final Rule

    a. Benefits

    The purpose and primary benefit of the final rule is to align the

    Commission's general commodity options provisions in part 32 with the

    Dodd-Frank swaps regime by providing, in general, that commodity

    options that are swaps (i.e., commodity options other than options on

    futures) will be treated the same as all other swaps, with one

    exception: commodity options satisfying the terms of a revised trade

    option exemption. The final rule is permissive and administrative in

    nature, necessitated by the Commission's plenary rulemaking authority

    over commodity options, which provides that: ``No person shall offer to

    enter into, enter into or confirm the execution of, any transaction

    involving any commodity regulated under this chapter which is [a

    commodity option transaction], contrary to any rule, regulation, or

    order of the Commission prohibiting any such transaction or allowing

    any such transaction under such terms and conditions as the Commission

    shall prescribe.'' \66\ As discussed above, the final rule also permits

    DCM-traded options on underlying commodities, albeit under the

    provisions of new part 32 rather than existing part 33. New part 32

    permits commodity options to trade subject to the same rules applicable

    to any other swap, and the Dodd-Frank Act permits swaps to be

    transacted on a DCM. These changes will further the public benefits

    Congress intended by applying the swaps statutory and regulatory

    regimes to commodity options generally.

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

    \66\ See CEA section 4c(b).

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

    b. Costs

    The Commission does not believe there are significant, if any,

    costs associated with the final rule relative to the requirements

    imposed by statute.

    [[Page 25332]]

    This is so because the final rule does not, by itself, impose any

    substantive or administrative requirements on commodity option market

    participants. Rather, by adopting this final rule, the Commission

    provides the required general authorization for commodity options that

    are subject to the swap definition, and removes any uncertainty as to

    whether CEA section 4c(b) would otherwise prohibit such commodity

    options. This is not to say that there are no significant costs

    associated with transacting commodity options. Although not specific to

    this final rule, there are costs attendant to the various regulations

    applicable to transacting in commodity options, including the costs of

    recordkeeping and reporting requirements. Those costs, however, are

    discussed in the various swaps rules that impose the substantive

    requirements.\67\

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

    \67\ E.g., Large Trader Reporting for Physical Commodity Swaps,

    76 FR 43851, Sept. 20, 2011; Position Limits for Futures and Swaps,

    76 FR 71626, Nov. 18, 2011; and Swap Dealer and Major Swap

    Participant Recordkeeping, Reporting, and Duties Rules; Futures

    Commission Merchant and Introducing Broker Conflicts of Interest

    Rules; and Chief Compliance Officer Rules for Swap Dealers, Major

    Swap Participants, and Futures Commission Merchants, 77 FR 20128,

    Apr. 3, 2012.

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

    4. Interim Final Rule Benefits and Costs

    a. Benefits

    Under the CEA, as amended by the Dodd-Frank Act, the Commission is

    under no statutory obligation to issue an exemption for trade options.

    In fact, a plain reading of section 721 of the Dodd-Frank Act makes

    clear that all commodity options are swaps, without any special

    treatment of trade options. However, in light of the comments received,

    the Commission believes that retaining a trade option exemption is in

    the public interest.

    The purpose and primary benefit of the interim final rule is that

    it preserves a means for hedging by commercial market participants

    through physically delivered options, albeit with important conditions

    and modifications from the existing trade option exemption. More

    specifically, the interim final rule provides a benefit (relative to

    the statutory requirements) in the form of a cost-saving exemption from

    certain swaps regulations for trade options on exempt and agricultural

    commodities as between certain commercial and financially-sophisticated

    counterparties. Additionally, the interim final rule benefits market

    participants that meet the conditions of the trade option exemption by

    eliminating the costs and inefficiencies that could result if the

    Commission were to pursue the alternative of requiring entity- or

    product-specific requests for exemptive orders.\68\

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

    \68\ Nevertheless, the Interim Final Rule does permit

    individuals to request exemptive orders on a case-by-case basis.

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

    b. Costs

    Although we consider certain costs that may result from the interim

    final rule, and make comparisons to various alternatives, the

    Commission does not believe that the interim final rule will impose

    mandatory costs on any entity because the rule is exemptive, rather

    than prescriptive, and entities are not required to rely on it.

    Therefore, the Commission assumes that an entity will rely on the

    exemption only if the anticipated benefits warrant the costs attendant

    to the conditions the Commission is attaching to the exemption.

    Notwithstanding this assumption, the conditions on the trade option

    exemption may impose some costs on entities that choose to rely on it.

    The interim final rule conditions the ability to transact trade

    options under the exemption on the following: offerors must be ECPs or

    commercials; offerees must be commercials; and the trade option, if

    exercised, must result in physical delivery.

    Under the interim final rule, those relying on the trade option

    exemption must comply with certain regulatory requirements, including:

    Recordkeeping and reporting; position limits; and large trader

    reporting. While the conditions applicable to entities availing

    themselves of the trade option exemption--for example, compliance with

    position limits and large trader reporting, and subjection to the

    various enforcement provisions \69\--are part of this Commission

    action, most of the costs and benefits of those requirements are

    discussed in other rulemakings, or are otherwise not expected to be

    significant. The costs and benefits of the recordkeeping and reporting

    obligations are discussed elsewhere.\70\ Moreover, reporting pursuant

    to the swaps large trader rules in part 20 will only be required for

    SDs and clearing members, and, based on the comments received on the

    NPRM, few trade option buyers are likely to fall within either of these

    categories. The speculative position limit rules of part 151 will only

    apply to trade options that involve ``referenced contracts'' pursuant

    to the terms of part 151, and the Commission expects that most trade

    options entered into by commercial parties would be exempt from

    position limits in any event based on a position limit exemption for

    bona fide hedging transactions. The SD and MSP-specific conditions in

    the trade option exemption, which incorporate certain provisions from

    part 23, similarly do not impose any additional cost burden on SDs/MSPs

    beyond the retention of existing rules applicable to SDs/MSPs.

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

    \69\ See, e.g., Prohibition on the Employment, or Attempted

    Employment, of Manipulative and Deceptive Devices and Prohibition on

    Price Manipulation, 76 FR 41398, July 14, 2011.

    \70\ See Swap Data Recordkeeping and Reporting Requirements, 77

    FR 2136, Jan. 13, 2012 (``Recordkeeping and Reporting Rules'').

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

    The costs attributable to the Commission's exercise of discretion

    in this rulemaking--and that have not been considered in other

    rulemakings--are those generated by the reporting and recordkeeping

    requirements imposed upon commercials transacting in trade options but

    not otherwise reporting their transactions. This action should reduce

    costs relative to the basic statutory requirements (with no further

    action by the Commission) which would have subjected all trade options

    to the full array of regulatory requirements for swaps, including but

    not limited to part 45. However, the Commission requests information

    and estimates about the costs and benefits to market participants and

    the public that would result from requiring market participants to

    report on their trade options at two levels: (1) the enterprise or

    group level (as described in section VI, question 2(f)(iii), above),

    and (2) the person level as is provided for in the interim final rule

    at Sec. 32.3(b)(1)(i).

    c. Costs and Benefits as Compared to Alternatives

    The range of alternative conditions available to the Commission

    with respect to who may transact trade options is wide--that is, the

    Commission could have decided that anyone or no one could be an offeror

    or offeree. Either of these extremes, however, would render almost

    meaningless either the exemption (if no one could be an offeror or an

    offeree) or the option element of the swap definition (if anyone could

    be an offeror or an offeree). Therefore, in striving to achieve the

    optimal balance of allowing those with a commercial need to hedge the

    price risk of a physical commodity while ensuring that there are enough

    market participants to provide the necessary liquidity to hedge that

    risk, the Commission determined to allow ECPs and non-ECP commercials

    to be offerors. On the offeror side, excluding commercial non-ECPs

    would have limited hedging opportunities available to non-ECPs who are

    active users of trade options as both buyers and sellers,

    [[Page 25333]]

    depending on their commercial need. On the offeree side, the Commission

    considered it important to preserve the integrity of the trade options

    market for use by commercial users. If the rule had allowed entities

    other than commercial users to be buyers, the trade option market would

    be indistinguishable, arguably, from the general swaps market; there

    would be no connection between a buyer's purchase of a trade option,

    the trade option buyer's underlying commercial functions, and the

    buyer's commercial need to make and take delivery.

    Similarly, the Commission could have elected to make the exemption

    available for trade options that, if exercised, result in either

    physical or financial settlement of the option. The Commission limited

    the condition to physical settlement out of a concern that if it

    allowed financial settlement, parties could evade the requirements

    otherwise applicable to swaps by merely labeling their transaction a

    trade option even though it was unrelated to their business as a

    commercial. The Commission notes, as did commenters, that the trade

    option exemption is rooted in a need by commercials to hedge the price

    risk of physical commodities, including but not limited to agricultural

    and energy commodities. Permitting financially-settled trade options

    would make this market, which is used for making or taking delivery of

    physical commodities needed for a commercial function,

    indistinguishable from the financial world of swaps and futures. In

    addition, and as noted above, commenters focused on the need for a

    trade option exemption specifically for physically delivered options.

    The Commission did not receive similar comments regarding financially

    settled transactions.

    The Commission also had a range of alternatives with respect to

    regulatory requirements applicable to trade option transactions. For

    commercials, the Commission considered alternatives, ranging from

    requiring full compliance with part 45 to no requirements in light of

    its special call authority to request and obtain information. Given

    that one of the purposes of the Dodd-Frank Act is to increase market

    transparency and regulatory visibility into OTC markets, however, the

    Commission does not believe an exemption with no attendant

    recordkeeping or reporting requirements for commercials is a reasonable

    alternative.\71\ At the same time, the Commission believes that

    requiring full compliance with part 45's recordkeeping and reporting

    requirements by commercials would be unnecessary to achieve the desired

    and expected benefits of the interim final rule. Therefore, to mitigate

    the costs of compliance for otherwise non-reporting counterparties, the

    Commission is only requiring such counterparties to keep basic business

    records regarding their trade options transactions and to file an

    annual report with the Commission.\72\

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

    \71\ See Recordkeeping an Reporting Rules, 77 FR at 2141, Jan.

    13, 2012 (explaining that ``[c]omplete records regarding each swap

    should be required from all counterparties, including non-SD/MSP

    counterparties to physical commodity swaps and other swaps, because

    such records are essential for effective market oversight and

    prosecution of violations by the Commission and other regulators''

    and that ``[e]xperience with recordkeeping requirements in the

    context of futures suggests that all market participants are able to

    retain such records'').

    \72\ The annual report would require counterparties to

    unreported trade options to provide: name and contact information;

    commodity categories (agricultural, metals, energy, or other); and

    approximate value (under $10 million, $10-100 million, over $100

    million) of commodities purchased or delivered in connection with

    options exercised during the prior calendar year.

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

    The Commission believes that the recordkeeping requirement in the

    interim final rule may result in additional costs for commercials that

    currently do not maintain the now-required records. However, the

    Commission believes that most, if not all, commercials already retain

    the basic business records required by the new rule as a matter of good

    business practice. With respect to reporting, the Commission believes

    the form prescribed by the Commission for annual reports will entail

    some administrative and legal costs for such commercials.

    Additionally, because the Commission believes that a distinction

    between agricultural commodities and other physical commodities is

    unwarranted, it is permitting agricultural trade options to rely on the

    revised general trade option exemption. The Commission declined to

    adopt the alternative that would have maintained this historically

    distinct treatment of trade options on agricultural commodities

    because, as commenter NGFA stated, the distinction was unwieldy and,

    consequently, the agricultural trade option (ATO) regime was largely

    unused.\73\ The Commission also did not elect to carry over the $10

    million net worth restriction under the existing ATO exemption in Sec.

    32.13(g). The Commission anticipates that the new trade option

    exemption will create new hedging opportunities for a wide range of

    agricultural commercial market participants that have heretofore been

    precluded from entering into trade options for agricultural commodities

    by that net worth restriction.

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

    \73\ NGFA at 2.

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

    5. Section 15(a) Factors (of the Final Rule and Interim Final Rule, as

    a Whole)

    As noted above, in this final rule and interim final rule, the

    Commission considers the costs and benefits that result from the

    regulations issued herein.

    a. Protection of Market Participants and the Public

    The interim final rule trade option exemption will further the

    protection of market participants and the public by ensuring that trade

    options continue to be authorized, subject to recordkeeping and

    reporting requirements, large trader reporting and position limit

    requirements, certain SD/MSP rules, and explicit antifraud, anti-

    manipulation, and enforcement protections. These requirements will

    provide the Commission and the public with increased visibility into

    this marketplace and will protect market participants from fraudulent

    conduct by others. In the same way, the final rule permits commodity

    options, generally, subject to the rules and protections applicable to

    every other swap pursuant to the Dodd-Frank Act (and its related

    rulemakings).

    b. Efficiency, Competitiveness, and Financial Integrity of the Markets

    The trade option exemption provides an important hedging and risk

    management tool for commercial market participants, while also

    providing the Commission with vital visibility tools (i.e., the

    recordkeeping and reporting requirements as well as the large trader

    reporting requirement) to help ensure the integrity of these markets.

    By permitting these valuable hedging and risk management tools, the

    Commission is facilitating the ability of market participants to hedge

    their risks more efficiently, since participants will have a larger set

    of hedging mechanisms available to them. In addition, providing a

    revised trade option exemption enhances competitiveness by continuing

    to provide market participants with a range of risk management choices.

    Finally, requiring option offerors to be ECPs or commercials enhances

    financial integrity by helping to assure that option grantors will have

    some minimal level of financial resources and sophistication, or will

    be commercial in nature, in order to reduce the risk that a seller

    would not be able to perform its obligations under a commodity option.

    [[Page 25334]]

    c. Price Discovery

    The trade options marketplace will continue to augment the

    exchange-traded financial markets in serving their price discovery

    function for a subject commodity. The Commission notes that there will

    be less price discovery for those trade options that are not otherwise

    required to meet the part 45 reporting requirements. Nevertheless, the

    Commission believes that the conditions discussed above should allow

    the trade options market to continue functioning in a manner that

    provides enough visibility to regulators. In addition, the Commission

    would have the authority to request and obtain additional information

    from trade option counterparties under its special call authority.

    d. Sound Risk Management Procedures

    The comments received on the NPRM (discussed above) highlighted

    trade options as a fundamental risk management tool for commercial

    users of many physical commodities. By issuing the interim final rule

    trade option exemption, the Commission is facilitating the use of trade

    options by these commercial market participants in conjunction with the

    general Dodd-Frank swaps regime. Specifically, when exchange-traded

    products do not provide the appropriate coverage or scope in connection

    with a hedging need for a commercial market operation, the trade option

    exemption will allow for agreements to be tailored by the parties on a

    transaction-by-transaction basis in order to meet the physical delivery

    needs of a commodity for a given commercial purpose. As noted above,

    the final rule provides an equally important component of the

    derivatives market (and a tool for risk management) by retaining a

    general authority for commodity options that are not trade options.

    e. Other Public Interest Considerations

    The Commission believes that providing the revised trade option

    exemption, in conjunction with the general authorization for all

    commodity options, is consistent with the public interest (particularly

    as demonstrated by the commenters) in providing effective and efficient

    risk management tools to commercial market participants, as well as in

    providing a strong legal framework for the trade options and general

    options market. The Commission acknowledges that the revised trade

    option exemption will remove those swaps that fall within it from

    certain aspects of the Dodd-Frank regime to which they otherwise would

    be subject. Nevertheless, based on its historical experience regulating

    commodity options, and the proven past utility of a trade option

    exemption for physical delivery options used by commercial parties, the

    Commission believes that exercise of its CEA section 4c(b) plenary

    authority to exempt trade options in the interim final rule is

    appropriate and benefits the public interest. In addition, the

    recordkeeping and reporting requirements, as well as the other

    conditions discussed above, should allow the trade options market to

    continue functioning in a manner that provides sufficient visibility to

    regulators.

    6. Request for Comment on CBC in Connection With Interim Final Rule

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

    determined to issue part 32 and the amendments to part 33 as described

    herein. The Commission invites public comment on its cost-benefit

    considerations in connection with the interim final rule trade option

    exemption. Commenters are encouraged to submit any data or other

    information that they may have quantifying or qualifying the costs and

    benefits of the interim final rule trade option exemption with their

    comment letters. In addition, the Commission seeks comment on whether

    the offeror requirement imposes any additional costs, particularly when

    compared with the general Dodd-Frank swaps regime, which does not

    otherwise provide for the trade option classification, and whether

    limiting the trade option exemption to physically delivered contracts

    (and requiring all other commodity options to transact under the

    general swaps rules) imposes any significant or unreasonable cost on

    market participants.

    B. Regulatory Flexibility Analysis

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

    consider whether the rules they issue will have a significant economic

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

    regulatory flexibility analysis respecting the impact.\74\ The final

    rule, in amending part 33, would affect entities that currently engage

    in options on physical commodities on a DCM, and the final rule and

    interim final rule, in replacing part 32, would affect those entities

    that currently engage in options under Sec. 32.4 and Sec. 32.13(g).

    By generally mandating that commodity options be treated as all other

    swaps, with one exemption for trade options, the effect of the rules

    has the potential to affect designated contract markets (``DCMs''),

    derivatives clearing organizations (``DCOs''), futures commission

    merchants (``FCMs''), large traders and eligible contract participants

    (``ECPs''), as well as SDs, MSPs, commodity pool operators (``CPOs''),

    swap execution facilities (``SEFs''), swap data repositories

    (``SDRs''), and certain non-ECP commercial market participants that

    enter into trade options.

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

    \74\ See 5 U.S.C. 601 et seq.

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

    1. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESP

    The Commission has previously determined that DCMs, DCOs, FCMs,

    CPOs, large traders, ECPs, and eligible swap participants (``ESPs'')

    are not small entities for purposes of the Regulatory Flexibility

    Act.\75\ Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the final and interim final

    rules adopted herein will not have a significant economic impact on a

    substantial number of small entities with respect to these entities.

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

    \75\ See, respectively and as indicated, 47 FR 18618, 18619,

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

    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).

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

    The Commission received one comment from the Power Coalition

    asserting that certain of its member entities may both be ECPs under

    the CEA and small businesses under the RFA. These members, as the

    Commission understands, have been determined to be small entities by

    the Small Business Administration (``SBA'') because they are

    ``primarily engaged in the generation, transmission, and/or

    distribution of electric energy for sale and [their] total electric

    output for the preceding fiscal year did not exceed 4 million megawatt

    hours.'' \76\ For all entities that may both be ECPs and have been

    determined by the SBA to be small businesses under the RFA, the initial

    regulatory flexibility analysis in the proposed rulemaking and the

    final regulatory flexibility analysis, in subsection ``5'' below,

    discusses the impact of the rulemaking on small entities.

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

    \76\ Small Business Administration, Table of Small Business Size

    Standards, (Nov. 5, 2010).

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

    2. SDs, MSPs, SEFs, and SDRs

    SDs, MSPs, SEFs, and SDRs are new categories of registrant under

    the Dodd-Frank Act. Pursuant to various Dodd-Frank rulemakings, the

    Commission has determined that SDs, MSPs, SEFs, and SDRs are not

    ``small entities'' for purposes of the RFA.\77\ Accordingly, the

    [[Page 25335]]

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the final and interim final rules adopted herein,

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

    impact on a substantial number of small entities.

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

    \77\ See respectively, Registration of Swap Dealers and Major

    Swap Participants, 77 FR 2613, 2620, Jan. 19, 2012 (swap dealers and

    major swap participants); Requirements for Derivatives Clearing

    Organizations, Designated Contract Markets, and Swap Execution

    Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR

    63732, 63745, Oct. 18, 2010 (SEFs); and Swap Data Repositories, 75

    FR 80898, 80926, Dec. 23, 2010 (SDRs).

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

    3. Entities Eligible To Engage in Options on Physical Commodities on

    DCMs Under Part 33

    Under the current part 33, there is no regulatory financial

    threshold that must be met in order to engage in options on underlying

    commodities on a DCM, so small entities would be eligible to engage in

    such transactions. In fact, there is no regulatory financial threshold

    that must be met in order to engage in any type of transaction on a

    DCM. As noted above, new CEA section 1a(47) provides that options,

    other than options on futures, are swaps. New CEA section 2(e) provides

    that non-ECPs may enter into swaps, if the swaps are entered into on a

    DCM. Therefore, even though an option on an underlying commodity is

    defined to be a swap under the Dodd-Frank Act, small entities will

    continue to be eligible to enter into such options on a DCM under the

    rules issued herein, just as they are eligible to enter into such

    options on a DCM under the current part 33. Thus, the final and interim

    final rules will have no effect on the eligibility of small entities to

    enter into an option on an underlying commodity on a DCM. Accordingly,

    the Chairman, on behalf of the Commission, hereby certifies pursuant to

    5 U.S.C. 605(b) that the final and interim final rules will not have a

    significant economic impact on a substantial number of small entities

    with respect to entities eligible to engage in options on underlying

    commodities on DCMs under part 33.

    4. Entities Engaged in Options Under Sec. 32.13(g)

    The Commission addressed the question of whether entities engaged

    in agricultural trade options under Sec. 32.13(g) are, in fact,

    ``small entities'' for purposes of the RFA in the NPRM. In the NPRM,

    the Commission determined that entities engaged in options under Sec.

    32.13(g) were not small entities.\78\ As noted above, the Commission

    previously has determined that ECPs are not small entities for the

    purpose of the RFA based upon, among other things, the financial and

    institutional requirements contained in the definition. Also as noted

    above, the exemption at Sec. 32.13(g) allows for options on the

    enumerated agricultural commodities to be sold when: (1) The option is

    offered to a commercial (``a producer, processor, or commercial user

    of, or a merchant handling'' the underlying commodity); (2) the

    commercial enters the transaction solely for purposes related to its

    business as such; and (3) each party to the option contract has a net

    worth of not less than $10 million. There are two analogous provisions

    in the ECP definition, new CEA sections 1a(18)(A)(v)(III) and

    1a(18)(A)(xi)(II). New CEA section 1a(18)(A)(v)(III) provides that an

    ECP includes a corporation, partnership, proprietorship, organization,

    trust, or other entity that has a net worth exceeding $1,000,000 and

    enters into a swap in connection with the entity's business or to

    manage the risk associated with an asset or liability owned or incurred

    or reasonably likely to be owned or incurred by the entity in the

    conduct of the entity's business. New CEA section 1a(18)(A)(xi)(II)

    provides that an ECP includes an individual who has assets invested on

    a discretionary basis, the aggregate of which is in excess of

    $5,000,000 and who enters the swap in order to manage the risk

    associated the an asset owned or liability incurred, or reasonably

    likely to be owned or incurred, by the individual. The participation

    requirements of Sec. 32.13(g)(1) are similar to, if not more

    restrictive than, the analogous ECP provisions.

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

    \78\ See 76 FR 6095, at 6107, Feb. 3, 2011.

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

    For purposes of the RFA in this rulemaking, the Commission is

    hereby determining that entities engaged in options under Sec.

    32.13(g) are not considered to be ``small entities'' for essentially

    the same reasons that ECPs have previously been determined not to be

    small entities. Accordingly, the Chairman, on behalf of the Commission,

    hereby certifies pursuant to 5 U.S.C. 605(b) that the final and interim

    final rules, with respect to entities engaged in options under Sec.

    32.13(g), will not have a significant impact on a substantial number of

    small entities.

    5. Entities Engaged in Options Under Existing Sec. 32.4

    In the NPRM, the Commission initially addressed the question of

    whether entities engaged in trade options under the existing trade

    options rule are, in fact, ``small entities'' for purposes of the

    RFA.\79\ As noted above, under the existing trade options rule, an

    option must be offered to a producer, processor, or commercial user of,

    or a merchant handling, the commodity, who enters into the commodity

    option transaction solely for purposes related to its business as such.

    The existing trade option exemption does not include any net worth

    requirement.

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

    \79\ See 76 FR 6095, at 6017-6018, Feb. 3, 2011.

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

    Because there is no net worth requirement in the existing trade

    option rule, thus allowing commercial entities of any economic status

    to enter into trade option transactions, the Commission is not in a

    position to determine whether entities engaged in options under the

    existing trade option rule include a substantial number of small

    entities on which the rule would have a significant economic impact.

    Therefore, the Commission provided an initial regulatory flexibility

    analysis in the NPRM addressing the proposed withdrawal of the existing

    trade option exemption on small entities. In the NPRM, the Commission

    identified the small entities that would be affected by the proposed

    withdrawal as any commercial small entity that would be smaller than an

    ECP and additionally would have annual receipts of less than

    $750,000.\80\

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

    \80\ 5 U.S.C. 601(6) (threshold for certain agricultural

    entities under the RFA).

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

    As referenced above, the Commission received a comment from the

    Power Coalition that may indicate that certain of their members, in

    particular entities that are ``primarily engaged in the generation,

    transmission, and/or distribution of electric energy for sale and

    [their] total electric output for the preceding fiscal year did not

    exceed 4 million megawatt hours,'' have been determined by the SBA to

    be small entities. Such entities may enter into option transactions,

    though the Commission does not have sufficient information to determine

    that any such entities would constitute a substantial number of small

    entities for purposes of the RFA.

    Moreover, for those entities that may enter into option

    transactions that would be ECPs with annual receipts greater than

    $750,000, but that also may be small entities as determined by SBA, it

    was not indicated in comments to the initial regulatory flexibility

    analysis that the effect of the proposed rulemaking would be any

    greater for these entities than for the smaller entities the Commission

    identified in the initial analysis. Indeed, on a relative basis, the

    larger the entity, the less of an effect the rulemaking should have.

    Critically, unlike a non-ECP, which will be unable to engage in option

    transactions except

    [[Page 25336]]

    on a DCM, and (if a commercial) through trade options, an entity that

    is both an ECP, as that term is defined in the CEA, and a small entity,

    as determined by the SBA, will not be so restricted.

    Therefore, the Commission offers, pursuant to 5 U.S.C. 604, the

    following final regulatory flexibility analysis:

    A description of the reasons why action by the agency is

    being considered.

    The Commission is taking this regulatory action to withdraw the

    existing trade option exemption because the Dodd-Frank Act has defined

    the term ``swap'' to include options. This new definition renders the

    existing trade option exemption obsolete in its current form.

    Responding to comments received on its NPRM, a revised trade option

    exemption is being issued as interim final rule Sec. 32.3.

    A succinct statement of the objectives of, and legal basis

    for, the rule.

    The objective for issuing interim final rule Sec. 32.3, is to make

    the Commission's regulations comport with the CEA as revised by the

    Dodd-Frank Act. As stated previously, the legal basis for the rule is

    the CEA definition of swap, section 1a(47)(A)(i), and the Commission's

    plenary options authority, CEA section 4c(b).

    A description of and, where feasible, an estimate of the

    number of small entities to which the rule will apply.

    The small entities to which the withdrawal of the trade option

    exemption and issuance of the final rule may apply are those commercial

    small entities that would be smaller than an ECP and additionally would

    have annual receipts of less than $750,000, or those commercial

    entities that would be an ECP with annual receipts of greater than

    $750,000 but that have been determined by SBA to be a small entity by

    virtue of the level of total electric output for the preceding fiscal

    year or equivalent metrics that would result in the entity being a

    small entity under the RFA.\81\ Because there are no reporting or

    registration requirements in the existing trade option exemption, it is

    difficult to quantify the exact number of small entities, if any, to

    which the rule may apply, and whether such entities in the aggregate

    would constitute a substantial number of small entities compared to the

    universe of entities to which the rule could apply. However, the

    impact, if any, is largely mitigated by the inclusion of interim final

    rule Sec. 32.3, a revised trade option exemption that will continue to

    be available for small entities that are, generally speaking,

    commercial actors entering into a commodity option for commercial

    purposes--including non-ECPs.

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

    \81\ 5 U.S.C. 601(6). See also note 76, above, which relates to

    the Power Coalition's concern that certain entities that meet or

    exceed the CEA's ECP thresholds may still be small entities for

    purposes of the RFA. This initial regulatory flexibility analysis

    applies equally to such entities.

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

    A description of the projected reporting, recordkeeping,

    and other compliance requirements of the rule, including an estimate of

    the classes of small entities which will be subject to the requirement

    and the type of professional skills necessary for preparation of the

    report or record.

    The withdrawal of the existing trade option exemption does not

    impose any reporting, recordkeeping, or other compliance requirements.

    However, because the Dodd-Frank Act provides that options are swaps,

    the swaps rules being promulgated under the Dodd-Frank Act in other

    rulemakings will contain reporting, recordkeeping, and other compliance

    requirements. In addition, the interim final rule trade option

    exemption at Sec. 32.3, issued herein, includes certain compliance

    obligations. However, those conditions do not impose any significant

    burden or requirement on a small entity that has not been or will not

    be imposed through another rulemaking, for which the Commission has, in

    its discretion, addressed RFA compliance separately,\82\ or by self-

    execution of the CEA as amended by the Dodd-Frank Act.

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

    \82\ See 5 U.S.C. 605(c).

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

    For example, the large trader reporting condition references part

    20, and would only fall on part 20 reporting entities, SDs and clearing

    members, and not on any small entity. The position limits condition

    would only apply part 151 position limits to the same extent they would

    apply to any other swap transaction entered into by the small entity.

    The SD/MSP rules from part 23 only apply to SDs and MSPs and not to any

    small entity. The antifraud and anti-manipulation condition has and

    will always apply to every entity transacting under the Commission's

    jurisdiction. In addition, the part 45 recordkeeping and reporting

    requirements in the trade option exemption generally only require

    recordkeeping and reporting to the same extent that such rules apply to

    any other swap, which the Commission has determined does not constitute

    a significant new burden as applied in the context of this rulemaking.

    The new Form TO annual notice filing requirement further mitigates

    the burden of the reporting requirement for counterparties who only

    engage in unreported trade options. The form is necessary to give the

    Commission at least a general overview, for market surveillance

    purposes, of the counterparties engaging in otherwise unreported trade

    options, and the types and approximate value of the commodities

    involved in such options. The form also provides contact information in

    case Commission surveillance staff needs to contact trade option

    counterparties to seek more detailed information regarding market

    events. While Form TO is a new form, and thus a new requirement for

    those required to file, it is a single annual filing, seeking very

    general and easily accessible information. The alternative to using

    form TO would be to apply the full part 45 reporting regulations.

    An identification, to the extent practicable, of all

    relevant Federal rules which may duplicate, overlap or conflict with

    the rule.

    Small entities that do not qualify as ECPs will be unable to engage

    in options transactions except on a DCM under an existing regulatory

    scheme, or if commercials, pursuant to the new trade option exemption

    in interim final rule Sec. 32.3. The trade option exemption at interim

    final rule Sec. 32.3 may be relied upon by a non-ECP that is a

    producer, processor, or commercial user of, or a merchant handling the

    commodity that is the subject of the commodity option transaction, or

    the products or by-products thereof, and that is offering or entering

    into the commodity option transaction solely for purposes related to

    its business as such. This provision will continue to permit many

    transactions that currently transact pursuant to the existing trade

    option exemption. The primary significant new requirement for trade

    options participants is the application of the recordkeeping and

    reporting requirement of part 45 (as well as the other trade option

    conditions, discussed above), and/or the Form TO notice filing

    requirement. Accordingly, there will be no rules applicable to the

    small entities, under the interim final rule trade option exemption,

    that duplicate, overlap, or conflict with any other Federal rules.

    Description of any significant alternatives to the rule

    which accomplish the stated objectives of applicable statutes and which

    minimize any significant economic impact of the rule on small entities.

    These may include, for example: (1) The establishment of differing

    compliance or reporting requirements or timetables that take into

    account the resources available to small entities; (2) the

    clarification, consolidation, or simplification of compliance and

    [[Page 25337]]

    reporting requirements under the rule for such small entities; (3) the

    use of performance rather than design standards; and (4) an exemption

    from coverage of the rule, or any part thereof, for such small

    entities.

    A potential alternative to limiting trade options under the

    existing trade option exemption to the requirements under interim final

    rule Sec. 32.3 (i.e., commercial participants and physically settled

    options) would be to either (1) delete the existing trade option and

    not replace it, or (2) create a special rule to allow any non-ECP to

    engage in such transactions and to allow such transactions to be either

    physically or financially settled. As explained in this document, and

    as stressed by the commenters, to adopt option (1) as a final rule

    (deleting the trade option provision altogether) would have been

    prohibitively costly and would have had a significant negative impact

    on hedging opportunities available to small entities. With regard to

    option (2), and as described above, interim final rule Sec. 32.3

    provides an exemption for certain commercial parties entering into

    physical commodity options for commercial purposes. Based on the

    comments received in response to the NPRM, discussed above, the

    Commission has determined that to treat all trade options in the same

    manner as any other swap (including permitting commodity options for

    all participants on a DCM), with the addition of the trade option

    exemption at Sec. 32.3, will provide an appropriate and flexible

    framework for the overwhelming majority of commodity options

    participants that will seek to rely on the trade option exemption. In

    addition, to retain a trade option exemption with no participant

    requirements and no physical delivery requirement would potentially

    undermine many of the market and consumer protections embodied in the

    swaps provisions of the Dodd-Frank Act.

    C. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501

    et seq. (``PRA'') are, among other things, to minimize the paperwork

    burden to the private sector, ensure that any collection of information

    by a government agency is put to the greatest possible uses, and

    minimize duplicative information collections across the government.\83\

    The PRA applies to all information, ``regardless of form or format,''

    whenever the government is ``obtaining, causing to be obtained [or]

    soliciting'' information, and includes required ``disclosure to third

    parties or the public, of facts or opinions,'' when the information

    collection calls for ``answers to identical questions posed to, or

    identical reporting or recordkeeping requirements imposed on, ten or

    more persons.'' \84\ The PRA requirements have been determined to

    include not only mandatory but also voluntary information collections,

    and include both written and oral communications.\85\ Under the PRA'',

    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''). With the exception of the new Form TO annual notice filing

    requirement, discussed below, the Commission believes that these rules

    will not impose any new information collection requirements that

    require approval of OMB under the PRA. The Commission notes that these

    rules will involve the withdrawal of certain provisions related to

    Commission forms, and will ultimately result in the expiration,

    cancellation, or removal of such forms.\86\ Because the rules would

    ultimately result in removing or deleting form filing and/or

    recordkeeping burdens, they will not result in the creation of any new

    information collection subject to OMB review or approval under the PRA,

    except for the new Form TO annual notice filing requirement discussed

    below. As a general matter, these rules would allow commodity options

    to trade under the same terms and conditions as all other swaps and

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

    collection requirements other than those that exist or have been

    proposed in the Commission's general swap-related Dodd-Frank

    rulemakings. The same analysis applies with respect to the general

    conditions applicable under the trade option exemption in Sec.

    32.3(b)--which conditions would only apply to the same extent they

    would apply to any other swap. Similarly, the application of the part

    45 recordkeeping and reporting requirements to trade options, via

    interim final rule Sec. 32.3(b), only imposes such requirements to the

    same extent they would apply to any other swap. That is, these specific

    recordkeeping and reporting costs have been accounted for in the

    information collection prepared by the Commission with respect to its

    part 45 rules. Also, collections of information that may be associated

    with engaging in commodity options or trade options are, or will be,

    addressed within each of the general swap-related rulemakings

    implementing the Dodd-Frank Act.\87\ To avoid creating duplicative PRA

    estimates, the Commission is not accounting again for those costs with

    respect to this rulemaking. Therefore, this final rule and interim

    final rule do not constitute a new collection of information by the

    Commission, other than those that may be associated with the new Form

    TO annual notice filing requirement.

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

    \83\ See 44 U.S.C. 3501.

    \84\ See 44 U.S.C. 3502.

    \85\ See 5 CFR 1320.3(c)(1).

    \86\ This includes any forms that relate to the agricultural

    trade option rules in current 17 CFR 32.13 and the dealer option

    rules in current 17 CFR 32.12.

    \87\ See, e.g., Position Limits for Futures and Swaps, 76 FR

    71626 at 71680-71683, Nov. 18, 2011; Large Trader Reporting for

    Physical Commodity Swaps, 76 FR 43851 at 43860-43862, July 22, 2011;

    Swap Data Recordkeeping and Reporting Requirements 77 FR 2136, at

    2171-2176, Jan. 13, 2012; and Swap Dealer and Major Swap Participant

    Recordkeeping and Reporting, Duties, and Conflicts of Interest

    Policies and Procedures; Futures Commission Merchant and Introducing

    Broker Conflicts of Interest Policies and Procedures; Swap Dealer,

    Major Swap Participant, and Futures Commission Merchant Chief

    Compliance Officer, 77 FR 20128, Apr. 3, 2012.

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

    As noted above, the interim final rule imposes a new Form TO annual

    notice filing requirement on counterparties to unreported trade

    options, which requirement is considered to be a collection of

    information within the meaning of the PRA. The Commission therefore is

    required to submit to OMB an information collection request for review

    and approval in accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR

    1320.8(d). The Commission will, by separate action, publish in the

    Federal Register a notice and request for comment on the paperwork

    burden associated with the interim final rule's Form TO annual notice

    filing requirement in accordance with 5 CFR 1320.8 and 1320.10. If

    approved, this new collection of information will be mandatory. As

    noted above, the Form TO annual notice filing would not be due to the

    Commission for the first time until March 1, 2014, for counterparties

    that enter into one or more unreported trade options during the 2013

    calendar year.

    The Commission specifically invites public comment on the accuracy

    of its estimate that no additional information collection requirements

    or changes to existing collection requirements, other than Form TO,

    would result from the interim final rule trade option exemption issued

    herein.

    [[Page 25338]]

    VIII. Final Rule and Interim Final Rule

    List of Subjects

    17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures,

    Reporting and recordkeeping requirements.

    17 CFR Part 32

    Commodity futures, Consumer protection, Fraud, Reporting and

    recordkeeping requirements.

    17 CFR Part 33

    Commodity futures, Consumer protection, Fraud, Reporting and

    recordkeeping requirements.

    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:

    PART 3--REGISTRATION

    0

    1. The authority citation for part 3 continues to read as follows:

    Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,

    6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,

    13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of the

    Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.

    111-203, 124 Stat. 1376 (July 21, 2010).

    Sec. 3.13 [Removed and Reserved]

    0

    2. Remove and reserve Sec. 3.13.

    0

    3. Revise part 32 to read as follows:

    PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

    Sec.

    32.1 Scope.

    32.2 Commodity option transactions; general authorization.

    32.3 Trade options.

    32.4 Fraud in connection with commodity option transactions.

    32.5 Option transactions entered into prior to the effective date of

    this part.

    Appendix A to 17 CFR Part 32

    Authority: 7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.

    Sec. 32.1 Scope.

    The provisions of this part shall apply to all commodity option

    transactions, except for commodity option transactions on a contract of

    sale of a commodity for future delivery conducted or executed on or

    subject to the rules of either a designated contract market or a

    foreign board of trade.

    Sec. 32.2 Commodity option transactions; general authorization.

    Subject to Sec. Sec. 32.1, 32.4, and 32.5, which shall in any

    event apply to all commodity option transactions, it shall be unlawful

    for any person or group of persons to 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

    commodity option transaction, unless:

    (a) Such transaction is conducted in compliance with and subject to

    the provisions of the Act, including any Commission rule, regulation,

    or order thereunder, otherwise applicable to any other swap, or

    (b) Such transaction is conducted pursuant to Sec. 32.3.

    Sec. 32.3 Trade options.

    (a) Subject to paragraphs (b), (c), and (d) of this section, the

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

    order thereunder, otherwise applicable to any other swap shall not

    apply to, and 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 commodity option transaction, provided that:

    (1) Such commodity option transaction must be offered by a person

    that has a reasonable basis to believe that the transaction is offered

    to an offeree as described in paragraph (a)(2) of this section. In

    addition, the offeror must be either:

    (i) An eligible contract participant, as defined in section 1a(18)

    of the Act, as further jointly defined or interpreted by the Commission

    and the Securities and Exchange Commission or expanded by the

    Commission pursuant to section 1a(18)(C) of the Act; or

    (ii) A producer, processor, or commercial user of, or a merchant

    handling the commodity that is the subject of the commodity option

    transaction, or the products or by-products thereof, and such offeror

    is offering or entering into the commodity option transaction solely

    for purposes related to its business as such;

    (2) The offeree must be a producer, processor, or commercial user

    of, or a merchant handling the commodity that is the subject of the

    commodity option transaction, or the products or by-products thereof,

    and such offeree is offered or entering into the commodity option

    transaction solely for purposes related to its business as such; and

    (3) The commodity option must be intended to be physically settled,

    so that, if exercised, the option would result in the sale of an exempt

    or agricultural commodity for immediate or deferred shipment or

    delivery.

    (b) In connection with any commodity option transaction entered

    into pursuant to paragraph (a) of this section, every counterparty

    shall comply with the swap data recordkeeping requirements of part 45

    of this chapter, as otherwise applicable to any swap transaction, and

    shall:

    (1) Comply with the swap data reporting requirements of part 45 of

    this chapter to the extent that the commodity option involves at least

    one counterparty (whether as offeror or offeree) that has--

    (i) Become obligated to comply with the reporting requirements of

    part 45,

    (ii) As a reporting party,

    (iii) During the twelve month period preceding the date on which

    the trade option is entered into,

    (iv) In connection with any non-trade option swap trading activity;

    or

    (2) For any counterparty that enters into one or more commodity

    options pursuant to Sec. 32.3(a) in a calendar year that do not

    involve a counterparty described in paragraph (b)(1) of this section,

    file with the Commission by March 1 of the following year an ``Annual

    Notice Filing for Counterparties to Unreported Trade Options'' on Form

    TO, as set forth in Appendix A to this part, to be completed and

    submitted in accordance with the instructions thereto and as further

    directed by the Commission.

    (c) In connection with any commodity option transaction entered

    into pursuant to paragraph (a) of this section, the following

    provisions shall apply to every trade option counterparty to the same

    extent that such provisions would apply to such person in connection

    with any other swap:

    (1) Part 20 (Swaps Large Trader Reporting) of this chapter;

    (2) Part 151 (Position Limits) of this chapter;

    (3) Subpart J of part 23 (Duties of Swap Dealers and Major Swap

    Participants) of this chapter;

    (4) Sections 23.200, 23.201, 23.203, and 23.204 of subpart F of

    part 23 (Reporting and Recordkeeping Requirements for Swap Dealers and

    Major Swap Participants) of this chapter; and

    (5) Section 4s(e) of the Act (Capital and Margin Requirements for

    Swap Dealers and Major Swap Participants).

    (d) In addition, any person or group of persons offering to enter

    into, entering into, confirming the execution of, maintaining a

    position in, or otherwise conducting activity related to a commodity

    option transaction in interstate commerce pursuant to paragraph (a) of

    this section shall remain subject to part 180 (Prohibition

    [[Page 25339]]

    Against Manipulation) and Sec. 23.410 (Prohibition on Fraud,

    Manipulation, and other Abusive Practices) of this chapter and the

    antifraud, anti-manipulation, and enforcement provisions of CEA

    sections 2, 4b, 4c, 4o, 4s(h)(1)(A, 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.

    (e) The Commission may, by order, upon written request or upon its

    own motion, exempt any person, either unconditionally or on a temporary

    or other conditional basis, from any provisions of this part, and the

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

    order thereunder, otherwise applicable to any other swap, other than

    Sec. 32.4, part 180 (Prohibition Against Manipulation), and Sec.

    23.410 (Prohibition on Fraud, Manipulation, and other Abusive

    Practices) of this chapter, and the antifraud, anti-manipulation, and

    enforcement provisions of CEA sections 2, 4b, 4c, 4o, 4s(h)(1)(A),

    4s(h)(4)(A), 6, 6c, 6d, 9, 13, if it finds, in its discretion, that it

    would not be contrary to the public interest to grant such exemption.

    Sec. 32.4 Fraud in connection with commodity option transactions.

    In or in connection with an offer to enter into, the entry into, or

    the confirmation of the execution of, any commodity option transaction,

    it shall be unlawful for any person directly or indirectly:

    (a) To cheat or defraud or attempt to cheat or defraud any other

    person;

    (b) To make or cause to be made to any other person any false

    report or statement thereof or cause to be entered for any person any

    false record thereof; or

    (c) To deceive or attempt to deceive any other person by any means

    whatsoever.

    Sec. 32.5 Option transactions entered into prior to the effective

    date of this part.

    Nothing contained in this part shall be construed to affect any

    lawful activities that occurred prior to the effective date of this

    part.

    Appendix A to 17 CFR Part 32

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    BILLING CODE C

    PART 33--REGULATION OF COMMODITY OPTION TRANSACTIONS THAT ARE

    OPTIONS ON CONTRACTS OF SALE OF A COMMODITY FOR FUTURE DELIVERY

    0

    4. The authority citation for part 33 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

    6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-

    1, 13b, 19, and 21, otherwise noted.

    0

    5. Revise the part heading to read as set forth above.

    0

    6. In Sec. 33.2, revise paragraph (b) to read as follows:

    Sec. 33.2 Applicability of Act and rules; scope of part 33.

    * * * * *

    (b) The provisions of this part apply to commodity option

    transactions that are options on contracts of sale of a commodity for

    future delivery except for commodity option transactions that are

    options on contracts of sale of a commodity for future delivery

    conducted or executed on or subject to the rules of a foreign board of

    trade.

    * * * * *

    Sec. 33.4 [Amended]

    0

    7. Amend Sec. 33.4 as follows:

    0

    a. Remove the words ``or for options on physicals in any commodity

    regulated under the Act,'' in the introductory text;

    0

    b. Remove and reserve paragraphs (a)(4) and (a)(5)(iv);

    0

    c. Remove the phrase ``or underlying physical'' from paragraph

    (b)(1)(iii); and

    0

    d. Remove the phrase ``, options on physicals,'' from paragraph (d)(3).

    0

    8. In Sec. 33.7:

    0

    a. Amend paragraph (b) introductory text by revising the second

    paragraph of the Options Disclosure Statement;

    0

    b. Remove the phrase ``or underlying physical commodity'' wherever it

    appears in paragraph (b)(1) including its undesignated paragraphs;

    0

    c. Remove the phrase ``(e.g., commitment to sell the physical)'' from

    the fourth undesignated paragraph under paragraph (b)(1);

    0

    d. Revise the fifth undesignated paragraph under paragraph (b)(1);

    0

    e. Remove the phrase ``or physical commodity'' from paragraph (b)(2)

    introductory text and paragraph (b)(2)(i);

    0

    f. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(5) both times it appears;

    0

    j. Revise the undesignated paragraph following paragraph (b)(5);

    0

    k. Remove the phrase ``or underlying physical commodity'' from

    paragraph (b)(6);

    0

    l. Remove the phrase ``or the physical commodity'' and the phrase ``or

    underlying physical commodity'' from paragraph (b)(7)(ii);

    [[Page 25344]]

    0

    m. Remove and reserve paragraph (b)(7)(iv); and

    0

    o. Remove the phrase ``or underlying physical commodity'' from

    paragraphs (b)(7)(v) and (x).

    The revisions read as follows:

    Sec. 33.7 Disclosure.

    * * * * *

    (b) * * *

    Options Disclosure Statement

    * * * * *

    BOTH THE PURCHASER AND THE GRANTOR SHOULD KNOW THAT THE OPTION IF

    EXERCISED, RESULTS IN THE ESTABLISHMENT OF A FUTURES CONTRACT (AN

    ``OPTION ON A FUTURES CONTRACT'').

    * * * * *

    (1) * * *

    The grantor of a put option on a futures contract who has a short

    position in the underlying futures contract is subject to the full risk

    of a rise in the price in the underlying position reduced by the

    premium received for granting the put. In exchange for the premium

    received for granting a put option on a futures contract, the option

    grantor gives up all of the potential gain resulting from a decrease in

    the price of the underlying futures contract below the option strike

    price upon exercise or expiration of the option.

    * * * * *

    (5) * * *

    Also, an option customer should be aware of the risk that the

    futures price prevailing at the opening of the next trading day may be

    substantially different from the futures price which prevailed when the

    option was exercised.

    * * * * *

    Issued in Washington, DC, on April 18, 2012, by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Appendices to Commodity Options Final Rule and Interim Final Rule--

    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 Sommers,

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

    commissioner voted in the negative.

    Appendix 2--Statement of Chairman Gary Gensler

    I support the final rules on Commodity Options. The Dodd-Frank

    Wall Street Reform and Consumer Protection Act includes commodity

    options within the statutory definition of ``swap.'' The final rule

    confirms that the same rules apply to commodity options as are

    applicable to other swaps, just as the law directs. In addition, the

    Commodity Futures Trading Commission will consider and seek comment

    on an interim final rule to provide a trade option exemption for

    certain commodity options that are physically delivered.

    We received a lot of feedback from commercial market

    participants that commodity options used by commercial entities to

    deliver or receive physical commodities in connection with their

    business don't need the same level of oversight as swaps. However,

    trade options will still be subject to position limits, appropriate

    reporting and recordkeeping requirements, and anti-fraud and anti-

    manipulation rules. The Commission is seeking additional comments on

    the trade option exemption, but the interim final rule makes the

    relief immediate.

    [FR Doc. 2012-9888 Filed 4-26-12; 8:45 am]

    BILLING CODE P

    Last Updated: April 27, 2012