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2013-20617

  • Federal Register, Volume 78 Issue 164 (Friday, August 23, 2013)[Federal Register Volume 78, Number 164 (Friday, August 23, 2013)]

    [Rules and Regulations]

    [Pages 52426-52429]

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

    [FR Doc No: 2013-20617]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AD64

    Retail Commodity Transactions Under Commodity Exchange Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Interpretation.

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    SUMMARY: On December 14, 2011, the Commodity Futures Trading Commission

    (``Commission'' or ``CFTC'') issued in the Federal Register an

    interpretation (``Interpretation'') regarding the meaning of the term

    ``actual delivery,'' as set forth in the Commodity Exchange Act. The

    Commission also requested public comment on whether the Interpretation

    accurately construed the statutory language. In response to the

    comments received, the Commission has determined to clarify its

    Interpretation.

    DATES: Effective August 23, 2013.

    FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel,

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

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

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

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

    SUPPLEMENTARY INFORMATION:

    I. Background

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

    Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

    of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')

    \3\ to establish a comprehensive new regulatory framework for swaps and

    security-based swaps. The legislation was enacted to reduce risk,

    increase transparency, and promote market integrity within the

    financial system by, among other things: (1) Providing for the

    registration and comprehensive regulation of swap dealers and major

    swap participants; (2) imposing clearing and trade execution

    requirements on standardized derivative products; (3) creating robust

    recordkeeping and real-time reporting regimes; and (4) enhancing the

    Commission's rulemaking and enforcement authorities with respect to,

    among others, all registered entities and intermediaries subject to the

    Commission's oversight.

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

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

    the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.

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

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

    2010.''

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

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

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

    CEA,\4\ entitled ``Retail Commodity Transactions.'' New CEA section

    2(c)(2)(D) broadly applies to any agreement, contract, or transaction

    in any commodity that is entered into with, or offered to (even if not

    entered into with), a non-eligible contract participant or non-eligible

    commercial entity on a leveraged or margined basis, or financed by the

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

    offeror or counterparty on a similar basis.\5\ New CEA section

    2(c)(2)(D) further provides that such an agreement, contract, or

    transaction shall be subject to CEA sections 4(a),\6\ 4(b),\7\ and 4b

    \8\ as if the agreement, contract, or transaction was a contract of

    sale of a commodity for future delivery.\9\

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    \4\ 7 U.S.C. 2(c)(2)(D).

    \5\ 7 U.S.C. 2(c)(2)(D)(i).

    \6\ 7 U.S.C. 6(a) (prohibition against off-exchange contracts of

    sale of a commodity for future delivery).

    \7\ 7 U.S.C. 6(b) (regulation of foreign boards of trade with

    United States participants).

    \8\ 7 U.S.C. 6b (prohibition against fraud).

    \9\ 7 U.S.C. 2(c)(2)(D)(iii).

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

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

    \10\ excepts a contract of sale that results in actual delivery within

    28 days or such other longer period as the Commission may determine by

    rule or regulation based upon the typical commercial practice in cash

    or spot markets for the commodity involved.\11\

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    \10\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).

    \11\ The Commission has not adopted any regulations permitting a

    longer actual delivery period for any commodity pursuant to new CEA

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

    delivery period set forth in this provision remains applicable to

    all commodities.

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    On December 14, 2011, the Commission issued an Interpretation

    inviting public comment on whether its stated interpretation of the

    term ``actual delivery,'' as used in new CEA section

    2(c)(2)(D)(ii)(III)(aa), accurately construes the statutory

    language.\12\ The Commission received several public comments on the

    Interpretation. After thoroughly reviewing those comments, the

    Commission has determined to clarify its Interpretation in response to

    the comments received.

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    \12\ Retail Commodity Transactions Under Commodity Exchange Act,

    76 FR 77670 (Dec. 14, 2011).

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    II. Summary of Comments

    A. Comments Generally

    The Commission received 13 comments in response to its

    Interpretation.\13\ The comments included 11 comment letters that

    addressed the Interpretation. These 11 comment letters were submitted

    by entities representing a broad range of interests, including a self-

    regulatory organization,\14\ precious metals dealers and depository

    companies,\15\ law firms,\16\ trade associations comprised of energy

    producers and suppliers,\17\ and electricity and natural gas

    suppliers.\18\

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    \13\ The comment file may be accessed at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1124.

    \14\ National Futures Association (NFA).

    \15\ Dillon Gage Group (DGG) and Monex Deposit Company and its

    affiliate (MDC).

    \16\ J.B. Grossman P.A. (JBG), Greenberg Traurig, LLP (GBT), and

    Rothgerber Johnson & Lyons LLP (RJL).

    \17\ National Energy Markets Association (NEM), Retail Energy

    Supply Association (RESA), and Commercial Energy Working Group

    (CEWG).

    \18\ Constellation NewEnergy, Inc., Green Mountain Energy

    Company, Direct Energy Services, LLC, Exelon Energy Company, Reliant

    Energy Retail Holdings, LLC, Liberty Power Corporation, and Champion

    Energy Services, LLC.

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    Of the 11 comment letters addressing the Interpretation, two voiced

    general support for the Interpretation. For example, NFA stated:

    NFA fully supports the Commission's proposed interpretation of

    the term [actual delivery] and believes that it is consistent with

    the statutory language.

    The comment letter submitted by DGG expressed its appreciation of

    the Commission's efforts to ``curtail any fraudulent retail commodity

    transactions occurring by unscrupulous actors.'' DGG further urged the

    Commission to consider delivery of precious metals to affiliates of the

    seller, but not to the seller itself, as constituting actual delivery

    under new CEA section 2(c)(2)(D)(ii)(III)(aa), stating that ``[w]hile

    we understand the CFTC's desire to ensure, among other things, that the

    seller actually has the commodity to deliver, an affiliate of one of

    the limited types of depositories described in Example 2 [of the

    Interpretation] are unlikely to be the

    [[Page 52427]]

    seller `fraudsters' Senator Lincoln had in mind.''

    Two of the comment letters submitted by law firms generally did not

    support the Interpretation. GBT stated that neither the Dodd-Frank Act

    nor its legislative history indicated Congress's desire to limit the

    depositories to which actual delivery could be made, and JBG voiced its

    view that delivery in the context of precious and industrial metals

    requires only transfer of title to metal, not physical delivery of

    metal.

    The third comment letter submitted by a law firm, RJL, was

    submitted on behalf of precious metals dealers. RJL requested

    clarification of when the Commission will consider the 28 days in new

    CEA section 2(c)(2)(D)(ii)(III)(aa) to begin and urged the Commission

    to allow for delivery of precious metals to additional depositories

    beyond those described in the Interpretation. RJL also requested

    clarification, as did MDC, a retail precious metals dealer, of whether

    the offset of a precious metals purchase prior to transfer of title to

    the customer and delivery of the precious metals to a depository within

    28 days would cause the original purchase to become a prohibited

    transaction under new CEA section 2(c)(2)(D).

    Finally, four of the comment letters were submitted by energy

    suppliers or trade associations comprised of energy producers and

    suppliers, and they generally requested clarification of whether new

    CEA section 2(c)(2)(D) and/or its exceptions apply to the sale and

    delivery of physical energy commodities, such as electricity and

    natural gas, to industrial, commercial, and/or retail customers on a

    recurring basis. For example, NEMA requested:

    that the Commission clarify that the type of transactions which its

    retail energy marketer members typically enter into with residential

    and commercial customers, in which they contract with the customer

    to provide physical energy supply (electricity or natural gas) for

    terms that regularly in the course of business contemplate delivery

    of the physical energy commodity in excess of 28 days, were not

    intended and should not be interpreted to constitute `retail

    commodity transactions' under the Act.

    B. Specific Comments

    1. Functional Approach and Relevant Factors

    Significantly, no commenters criticized, expressed disagreement

    with, or questioned the underlying foundation for the Commission's

    approach in determining whether ``actual delivery'' has occurred, as

    set forth in the Interpretation: ``The determination of whether `actual

    delivery' has occurred within the meaning of new CEA section

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

    delivery beyond the four corners of contract documents;'' and ``in

    determining whether actual delivery has occurred within 28 days, the

    Commission will employ a functional approach and examine how the

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

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

    the agreement, contract, or transaction.'' \19\ Further, no comment

    letters criticized, expressed disagreement with, or questioned the

    relevant factors the Commission enumerated in the Interpretation:

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

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

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

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

    the manner in which the purchase or sale is recorded and completed.\20\

    Accordingly, the Commission will assess whether any given transaction

    results in actual delivery within the meaning of new CEA section

    2(c)(2)(D)(ii)(III)(aa) by employing the functional approach and

    considering the factors set forth in the Interpretation.

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    \19\ 76 FR 77670, 77672 (Dec. 14, 2011).

    \20\ Id.

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    2. When the 28-Day Period Begins

    In response to the comment from RJL, the Commission is clarifying

    when it will consider the 28-day period in new CEA section

    2(c)(2)(D)(ii)(III)(aa) to begin. The Commission has determined that

    the most practical point at which to begin counting the 28 days is the

    date on which the agreement, contract, or transaction is entered into.

    This approach is consistent with the functional approach the Commission

    will take in determining whether actual delivery has occurred, and it

    should provide industry participants and the public with a readily

    ascertainable date for determining whether actual delivery has occurred

    within the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa).

    3. Interpretation Examples

    The Interpretation included five examples to illustrate how the

    Commission would determine whether actual delivery has occurred within

    the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa), and several

    comment letters urged the Commission to allow for delivery of

    commodities to depositories beyond those described in Example 2 or

    expressed disagreement with any limitation imposed on acceptable

    depositories or the precise form of delivery. The Commission has

    considered these comments and has determined to clarify the intent

    behind these examples.

    The examples are non-exclusive and are included to provide the

    public with guidance on how the Commission will apply the relevant

    factors enumerated in the Interpretation in making its determination of

    whether actual delivery has occurred within the meaning of new CEA

    section 2(c)(2)(D)(ii)(III)(aa). Examples 1 and 2 do not encompass all

    scenarios in which the Commission may determine that actual delivery

    has occurred, nor do Examples 3, 4, and 5 encompass all scenarios in

    which the Commission may determine that actual delivery has not

    occurred. Specifically, with regard to Example 2, the Commission may

    determine that actual delivery has occurred if a commodity is delivered

    to an affiliate of the seller or is already physically located at a

    depository, so long as the commodity is otherwise delivered in

    accordance with the methods described in Example 2, if a careful

    consideration of the other relevant factors enumerated in the

    Interpretation demonstrates that the purported delivery is not simply a

    sham and that actual delivery has occurred within the meaning of new

    CEA section 2(c)(2)(D)(ii)(III)(aa). Conversely, the Commission may

    determine that actual delivery has not occurred if a commodity is

    purportedly delivered to an affiliate of the seller, but the Commission

    is unable to obtain sufficient assurances within a reasonable period of

    time that the purported delivery is not simply a sham.

    4. Offsetting of Transactions

    Two commenters, in response to Example 5 of the Interpretation,

    requested clarification of whether the offset of a precious metals

    purchase prior to transfer of title to the customer and delivery of the

    precious metals to a depository within 28 days would cause the original

    purchase to become a prohibited transaction under new CEA section

    2(c)(2)(D). After careful consideration of this comment, the Commission

    has determined that Example 5 accurately illustrates the Commission's

    views of whether actual delivery will have occurred under the

    circumstances described in Example 5. However, the Commission

    recognizes that a customer may request to cancel a purchase of a

    commodity prior to actual delivery of the commodity within 28 days due

    to extraordinary market

    [[Page 52428]]

    circumstances. Accordingly, the Commission will not prosecute a seller

    for permitting such a cancellation, provided that the seller does so

    only on limited occasions and at the customer's request, and further

    provided that the customer does not enter into a subsequent transaction

    within three business days of such cancellation.

    5. Energy Producers and Suppliers

    Four comment letters requested clarification of whether new CEA

    section 2(c)(2)(D) and/or any of its exceptions apply to the sale and

    delivery of physical energy commodities to industrial, commercial, and/

    or retail customers on a recurring basis. Specifically, under the

    scenario described in these comment letters, energy firms enter into

    fixed price contracts with customers to supply electricity or natural

    gas to the customer's residence or business for a period of one or more

    years. The customer consumes the electricity or natural gas and

    subsequently pays for that usage, along with all applicable taxes, on a

    periodic basis. The Commission is not of the view that new CEA section

    2(c)(2)(D) applies to this scenario, particularly in light of the fact

    that the customer regularly receives delivery of and consumes the

    physical energy commodity over the term of the contract and

    periodically pays for that usage.

    III. Commission Interpretation of ``Actual Delivery''

    In consideration of the foregoing, the Commission issues the

    following interpretation to inform the public of the Commission's views

    as to the meaning of the term ``actual delivery'' as used in new CEA

    section 2(c)(2)(D)(ii)(III)(aa) and to provide the public with guidance

    on how the Commission intends to assess whether any given transaction

    results in actual delivery within the meaning of the statute. This

    interpretation does not address the meaning or scope of new CEA section

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

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

    Similarly, this interpretation does not address the meaning or scope of

    contracts of sale of a commodity for future delivery, the forward

    contract exclusion from the term ``future delivery'' set forth in CEA

    section 1a(27),\22\ or the forward contract exclusion from the term

    ``swap'' set forth in CEA section 1a(47)(B)(ii).\23\ Nor does this

    interpretation alter any statutory interpretation or statement of

    Commission policy relating to the forward contract exclusion.\24\

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

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

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

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

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

    Interpretation'').

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    In the view of the Commission, the determination of whether

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

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

    delivery beyond the four corners of contract documents. This

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

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

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

    Consistent with this interpretation of the statutory language, in

    determining whether actual delivery has occurred within 28 days of the

    date the agreement, contract, or transaction is entered into, the

    Commission will employ a functional approach and examine how the

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

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

    the agreement, contract, or transaction. This approach best

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

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

    delivery.''

    Relevant factors in this determination include the following:

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

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

    contract, or transaction, including all related documentation; the

    nature of the relationship between the buyer, seller, and possessor of

    the commodity purchased or sold; and the manner in which the purchase

    or sale is recorded and completed. The Commission provides the

    following non-exclusive examples to illustrate how it will determine

    whether actual delivery has occurred within the meaning of new CEA

    section 2(c)(2)(D)(ii)(III)(aa). The Commission may also determine that

    actual delivery has occurred in circumstances beyond those described in

    the first two examples if it can readily determine within a reasonable

    period of time that the purported delivery is not simply a sham and

    that actual delivery has occurred within 28 days within the meaning of

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

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

    days, the seller has: (1) Physically delivered the entire quantity

    of the commodity purchased by the buyer, including any portion of

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

    possession of the buyer; and (2) has transferred title to that

    quantity of the commodity to the buyer.

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

    days, the seller has: (1) Physically delivered the entire quantity

    of the commodity purchased by the buyer, including any portion of

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

    specifically segregated or fungible bulk form, into the possession

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

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

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

    warehouse receipts of which are recognized for delivery purposes for

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

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

    any United States agency; and (2) has transferred title to that

    quantity of the commodity to the buyer.\25\

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    physically delivered the entire quantity of the commodity purchased

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

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

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

    agreement, contract, or transaction between the buyer and seller

    purports to create an enforceable obligation on the part of the

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

    the seller, to deliver the commodity to the buyer.

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

    days, the seller has purported to physically deliver the entire

    quantity of the commodity purchased by the buyer, including any

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

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

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

    document fails to identify the specific financial institution,

    depository, or storage facility with possession of the commodity,

    the quality specifications of the commodity, the identity of the

    party transferring title to

    [[Page 52429]]

    the commodity to the buyer, and the segregation or allocation status

    of the commodity.

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

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

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

    another transaction or settled in cash between the buyer and the

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

    described in Example 1 or 2, physically delivered the entire

    quantity of the commodity purchased by the buyer, including any

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

    and transferred title to that quantity of the commodity to the

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

    between the buyer and seller purports to create an enforceable

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

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

    the buyer.

    Issued in Washington, DC, on August 20, 2013, by the Commission.

    Christopher J. Kirkpatrick,

    Deputy Secretary of the Commission.

    Appendix to Retail Commodity Transactions Under Commodity Exchange

    Act--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative. No Commissioners voted

    in the negative.

    [FR Doc. 2013-20617 Filed 8-22-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: August 23, 2013



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