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2010-26951

  • FR Doc 2010-26951[Federal Register: October 26, 2010 (Volume 75, Number 206)]

    [Proposed Rules]

    [Page 65586-65593]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr26oc10-19]

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    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 1

    RIN 3038-AD23

    Agricultural Commodity Definition

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

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

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

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

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

    which amends the Commodity Exchange Act (``CEA'' or ``Act''), includes

    provisions applicable to ``a swap in an agricultural commodity (as

    defined by the [CFTC]).'' Neither Congress nor the CFTC has previously

    promulgated a definition of that term for purposes of the CEA or CFTC

    regulations. This notice reviews the statutory and regulatory history

    of the term ``agricultural commodity'' in the context of the CEA and

    Commission regulations and proposes a definition of that term for

    purposes of the CEA and Commission regulations.

    DATES: Comments must be received on or before November 26, 2010. The

    Commission is not inclined to grant extensions of this comment period.

    ADDRESSES: You may submit comments, identified by RIN number 3038-AD21,

    by any of the following methods:

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

    Follow the instructions for submitting comments.

    E-mail for Comments: agdefnprm@cftc.gov. Include the RIN

    number 3038-AD21 in the subject line of the message.

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

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

    Street, NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

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

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

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

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

    information that 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 established procedures in

    CFTC Regulation 145.9.\1\

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    \1\ 17 CFR 145.9.

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    The Commission 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 the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special

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

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

    Oversight, Commodity Futures Trading Commission, Three Lafayette

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

    SUPPLEMENTARY INFORMATION:

    Part I--Background

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

    Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act

    \3\ amended the CEA \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 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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    \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 Sec. 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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    The Dodd-Frank Act includes provisions applicable to ``a swap in an

    agricultural commodity (as defined by the [CFTC]).'' Neither Congress

    nor the CFTC has previously promulgated a definition of that term for

    purposes of the CEA or CFTC regulations. This notice reviews the

    statutory and regulatory history of the term ``agricultural commodity''

    in the context of the CEA and Commission regulations and proposes a

    definition of that term for purposes of the CEA and Commission

    regulations.

    A. Statutory Framework and History--``Agricultural Commodity''

    1. The Commodity Exchange Act

    In developing a proposed definition of ``agricultural commodity''

    for purposes of the CEA and CFTC regulations, the Commission first

    considered the historical development of federal commodities regulation

    in the United States. Before 1974, the Commodity Exchange Act, 7 U.S.C.

    1 et seq., gave the Commodity Exchange Authority \5\ jurisdiction over

    only those commodities specifically enumerated in the Act. Starting

    with the 1936 Act, the CEA applied to certain transactions in

    commodities then being traded for future delivery on certain U.S.

    futures exchanges, including wheat, cotton, rice, corn, oats, barley,

    rye, flaxseed, grain sorghum, mill feeds, butter, eggs, and Solanum

    tuberosum (Irish potatoes).\6\ As the exchanges regulated under the CEA

    added futures contracts for additional commodities, all of which were

    agricultural in nature, subsequent amendments to the Act added those

    [[Page 65587]]

    additional commodities to the Act's list of enumerated commodities.\7\

    Thus, prior to 1974, the CEA provided authority exclusively for the

    regulation of futures transactions in those commodities enumerated in

    the statute, all of which were agricultural in nature.

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    \5\ The Commodity Exchange Authority was an agency of the United

    States Department of Agriculture and was established to administer

    the CEA. For a detailed history of the evolution of the various

    agencies charged with administering the CEA, see http://

    www.archives.gov/research/guide-fed-records/groups/180.html. The

    Commodity Exchange Authority was the predecessor of the CFTC.

    \6\ See Act of June 15, 1936, Public Law 74-675, 49 Stat. 1491

    (1936), which, among other things, set out the original list of

    enumerated commodities and changed the name of the ``Grain Futures

    Act'' to the ``Commodity Exchange Act.'' However, the CEA did not

    apply to all commodity futures markets then in existence, such as

    markets for coffee, cocoa, sugar, and metals.

    \7\ Wool tops were added in 1938. Commodity Exchange Act

    Amendment of 1938, Public Law 75-471, 52 Stat. 205 (1938). Fats and

    oils, cottonseed meal, cottonseed, peanuts, soybeans and soybean

    meal were added in 1940. Commodity Exchange Act Amendment of 1940,

    Public Law No. 76-818, 54 Stat. 1059 (1940). Livestock, livestock

    products, and frozen concentrated orange juice were added in 1968.

    Commodity Exchange Act Amendment of 1968, Public Law 90-258, 82

    Stat. 26 (1968) (livestock and livestock products); Act of July 23,

    1968, Public Law 90-418, 82 Stat. 413 (1968) (frozen concentrated

    orange juice). Trading in onion futures on United States exchanges

    was prohibited in 1958. Commodity Exchange Act Amendment of 1958,

    Public Law 85-839, 72 Stat. 1013 (1958).

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    With the enactment of the Commodity Futures Trading Commission Act

    of 1974 (``the 1974 Act''),\8\ Congress overhauled the CEA and created

    the Commodity Futures Trading Commission, an independent regulatory

    agency with powers greater than those of its predecessor agency, the

    Commodity Exchange Authority. For the purposes of this Notice, the most

    significant change was that, while the Commodity Exchange Authority

    only regulated those commodities enumerated in the CEA, which were all

    agricultural in nature, the 1974 Act granted the CFTC exclusive

    jurisdiction over futures trading in all commodities traded for future

    delivery, including not only the enumerated commodities, but also ``all

    other goods and articles * * * and all services, rights, and interests

    in which contracts for future delivery are presently or in the future

    dealt in.'' \9\ For the first time, the CEA would apply to all U.S.

    futures exchanges and to the full range of commodities that were or

    could be traded for future delivery thereon, including many commodities

    that did not fall under the enumerated agricultural category--for

    example, coffee, sugar, cocoa, metals and energy products, as well as

    interest rates, currencies, and other financial commodities.\10\

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    \8\ See Commodity Futures Trading Commission Act of 1974, Public

    Law 93-463, 88 Stat. 1389 (1974).

    \9\ Except, of course, onions, which were excluded in 1958. See

    cite in footnote 7, above.

    \10\ See the pre-Dodd-Frank CEA definition of ``commodity,''

    which had remained unchanged since the 1974 amendments: ``The term

    ``commodity'' means wheat, cotton, rice, corn, oats, barley, rye,

    flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum

    tuberosum (Irish potatoes), wool, wool tops, fats and oils

    (including lard, tallow, cottonseed oil, peanut oil, soybean oil,

    and all other fats and oils), cottonseed meal, cottonseed, peanuts,

    soybeans, soybean meal, livestock, livestock products, and frozen

    concentrated orange juice, and all other goods and articles, except

    onions as provided in Public Law 85-839 (7 U.S.C. 13-1), and all

    services, rights, and interests in which contracts for future

    delivery are presently or in the future dealt in.''

    The agricultural commodities specifically identified in current

    CEA Sec. 1a(4) are often referred to as the ``enumerated''

    agricultural commodities. The Dodd-Frank Act redesignates current

    CEA Sec. 1a(4) as new CEA Sec. 1a(9) and adds ``motion picture box

    office receipts (or any index, measure, value or data related to

    such receipts)'' as a second commodity which, along with onions, is

    specifically excluded from the Act's definition of commodity.

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    2. The Commodity Futures Modernization Act

    In 2000, the Commodity Futures Modernization Act of 2000 (``CFMA'')

    \11\added certain exemptions for swaps \12\ transactions to the CEA.

    One exemption appears in current CEA Sec. 2(g).\13\ With the Sec.

    2(g) swaps exemption, Congress for the first time made an explicit

    distinction between agricultural commodities and other commodity

    categories. The Sec. 2(g) exemption explicitly excluded any

    ``agreement, contract, or transaction'' in an ``agricultural

    commodity.'' Instead of providing a definition for agricultural

    commodity in this context, Congress used the term in conjunction with

    the definition of exempt commodity--defined as neither an agricultural

    commodity nor an excluded commodity.\14\ Excluded commodities were in

    turn defined at current CEA Sec. 1a(13) to include financial

    commodities such as interest rates, currencies, economic indexes, and

    other similar items. Thus, of the three operative terms, only

    agricultural commodity was not ascribed a formal definition.\15\

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    \11\ The CFMA was enacted into law as Appendix E to Public Law

    106-554, the Consolidated Appropriations Act, 2001 (2000).

    \12\ Prior to the Dodd-Frank Act, the Commission had defined a

    ``swap'' as follows: ``A swap is a privately negotiated exchange of

    one asset or cash flow for another asset or cash flow. In a

    commodity swap [including an agricultural swap], at least one of the

    assets or cash flows is related to the price of one or more

    commodities.'' (See 72 FR 66099, note 7 (November 27, 2007)). See

    new CEA Sec. 1a(47) for the statutory definition of a ``swap,'' as

    added to the CEA by Sec. 721 of the Dodd-Frank Act.

    \13\ Current Sec. 2(g) provides:

    Excluded swap transactions

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

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

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

    than an agricultural commodity if the agreement, contract, or

    transaction is--

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

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

    transaction;

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

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

    CEA Sec. 2(g), 7 U.S.C. Sec. 2(g). Current CEA Sec. 2(g) was

    added to the CEA by Sec. 105(b) of the CFMA, enacted as Appendix E

    to Public Law 106-554.

    \14\ ``The term `exempt commodity' means a commodity that is not

    an excluded commodity or an agricultural commodity.'' Current CEA

    Sec. 1a(14).

    \15\ Another swap exemption was provided in current CEA Sec.

    2(h), which affects transactions in exempt commodities. Current CEA

    Sec. 2(h) was added to the CEA by Sec. 106 of the CFMA. Also,

    current CEA Sec. 2(d) contains a swap exemption for transactions in

    excluded commodities. Current CEA Sec. 2(d) was added to the CEA by

    Sec. 103 of the CFMA.

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    There is limited legislative history regarding the CFMA to explain

    Congress' intent in excluding ``agricultural commodities'' from the

    Sec. 2(g) swaps exemption.\16\ However, the legislative history of

    H.R. 4541 (106th Congress), the predecessor to the CFMA (H.R.

    5660),\17\ which included the same basic structure of excluded and

    exempt commodities, indicates that Congress did not intend that the

    term ``agricultural commodity'' be limited to those commodities

    enumerated in the definition of the term ``commodity'' in current CEA

    Sec. 1a(4).\18\ The House Committee on Agriculture stated the

    following:

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    \16\ H.R. 5660, the final version of the CFMA, which was enacted

    into law as an appendix to Public Law 106-554, the Consolidated

    Appropriations Act, 2001, was not accompanied by congressional

    committee reports.

    \17\ H.R. 4541, also titled the Commodity Futures Modernization

    Act of 2000, was reported by all three committees of jurisdiction

    (Agriculture, Commerce, and Banking and Financial Services) in the

    House of Representatives and was passed by the House on October 19,

    2000 by a vote of 377 yeas to 4 nays. On December 14, 2000, H.R.

    5660 was introduced and contained major provisions of the House-

    passed version of H.R. 4541.

    \18\ See footnote 10 above.

    The Committee notes that the term ``exempt commodity'' means a

    commodity other than an ``excluded commodity'' or an ``agricultural

    commodity.'' For purposes of this definition, the Committee intends

    ``agricultural commodity'' to include all agricultural commodities,

    whether or not such agricultural commodities are specifically

    enumerated in the definition of ``commodity'' in section 1a[4] of

    the CEA.\19\

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    \19\ H.R. Rep. No. 106-711, Part 1, at 33 (June 29, 2000).

    Notably, the definition of exempt commodity, and its interplay with

    both agricultural and excluded commodities, did not change from H.R.

    4541 to H.R. 5660, the final version of the CFMA as enacted into law.

    3. The Dodd-Frank Act

    The Dodd-Frank Act, when it becomes effective, will delete two

    references to ``agricultural commodity'' that were added to the CEA by

    the CFMA.\20\ First, the Dodd-Frank Act will

    [[Page 65588]]

    delete the current CEA Sec. 2(g) swaps exemption.\21\ Second, the

    Dodd-Frank Act will eliminate a provision, found in current CEA Sec.

    5a(b)(2)(F), that deals with the permissibility of trading agricultural

    commodities on a derivatives transaction execution facility (``DTEF'').

    The Dodd-Frank Act repeals current CEA Sec. 5a \22\ (which provides

    for the registration and regulation of DTEFs).\23\

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    \20\ Two other references to agricultural commodities that were

    added to the CEA by the CFMA will remain in the CEA, but are not

    relevant to defining an agricultural commodity. CEA Sec. 5c(c)

    provides that a designated contract market must seek prior

    Commission approval for any rule amendment that would make material

    changes in any futures contract in an enumerated agricultural

    commodity, if the rule amendment applies to contracts and delivery

    months which have been listed for trading and have open interest.

    CEA Sec. 4q requires the Commission to consider procedures to

    encourage bona fide hedging on contract markets by domestic

    agricultural producers.

    Title IV of the CFMA included an additional reference to

    ``agricultural commodity'' that was not an amendment to the CEA. The

    Legal Certainty for Bank Products Act, enacted as Title IV of the

    CFMA, includes a definition of ``covered swap agreement'' that

    incorporates a reference to ``a commodity other than an agricultural

    commodity enumerated in section 1a(4).'' Section 725(g) of the Dodd-

    Frank Act deletes all references to ``covered swap agreement,''

    including the reference to agricultural commodities, from the Legal

    Certainty for Bank Products Act.

    \21\ See Sec. 723(a)(1)(A) of the Dodd-Frank Act. That

    provision of the Dodd-Frank Act will also delete current CEA Sec.

    2(h) regarding swaps in exempt commodities. Current CEA Sec. 2(h)

    does not explicitly mention agricultural commodities but, as noted

    above, exempt commodities are defined as those that are neither

    agricultural nor excluded commodities.

    \22\ See Sec. 734(a) of the Dodd-Frank Act.

    \23\ In addition, CEA Sec. 5(e)(2), which was added to the CEA

    by the CFMA, provides that the Commission, through notice and

    comment rulemaking, may allow futures and options in agricultural

    commodities to trade on DTEFs. Once the Dodd-Frank Act repeals the

    authority for DTEFs, Sec. 5(e)(2) will no longer have any practical

    effect.

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    The Dodd-Frank Act also contains several new provisions relating to

    agricultural commodities. Section 721(a)(21) of the Dodd-Frank Act adds

    a new Sec. 1a(47) to the CEA that defines the term ``swap.'' As part

    of the definition, clause (iii) of Sec. 1a(47)(A) provides that a swap

    includes ``any agreement, contract, or transaction commonly known as *

    * * an agricultural swap * * *.'' \24\ In addition, the Dodd-Frank

    Act's definition of swap includes commodity options, other than

    exchange-traded options on futures, thus requiring off-exchange options

    on agricultural commodities to be regulated as swaps.\25\

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    \24\ See new CEA Sec. 1a(47)(A)(iii)(XX) as added by Sec.

    721(a)(21) of the Dodd-Frank Act.

    \25\ See new CEA Sec. 1a(47)(A)(i) and new CEA Sec.

    1a(47)(B)(i) as added by Sec. 721(a)(21) of the Dodd-Frank Act:

    * * * SWAP.--

    (A) IN GENERAL.--Except as provided in subparagraph (B), the

    term `swap' means any agreement, contract, or transaction--

    (i) That is * * * [an] option of any kind that is for the

    purchase or sale * * * [of] commodities * * *.

    (B) EXCLUSIONS.--The term `swap' does not include--

    (i) any contract of sale of a commodity for future delivery (or

    option on such a contract) * * *.

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    Section 723(c)(3)(A) of the Dodd-Frank Act, which is a free-

    standing provision that does not amend the CEA, contains a general rule

    that, except as provided in Sec. 723(c)(3)(B), ``no person shall offer

    to enter into, enter into, or confirm the execution of, any swap in an

    agricultural commodity (as defined by the [CFTC]).'' Section

    723(c)(3)(B) provides that a swap in an agricultural commodity may be

    permitted pursuant to the Commission's exemptive authority under CEA

    Sec. 4(c), ``or any rule, regulation, or order issued thereunder

    (including any rule, regulation, or order in effect as of the date of

    enactment of this Act) by the [CFTC] to allow swaps under such terms

    and conditions as the Commission shall prescribe.''

    Section 733 of the Dodd-Frank Act adds a new Sec. 5h to the CEA

    that governs the registration and regulation of swap execution

    facilities. New CEA Sec. 5h(b)(2) provides that a swap execution

    facility ``may not list for trading or confirm the execution of any

    swap in an agricultural commodity (as defined by the Commission) except

    pursuant to a rule or regulation of the Commission allowing the swap

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

    Section 737 of the Dodd-Frank Act amends CEA Sec. 4a to direct the

    Commission to adopt position limits for futures, exchange-traded

    options, and swaps that are economically equivalent to futures and

    exchange-traded options within 180 days of the date of enactment of the

    Dodd-Frank Act for exempt commodities and within 270 days of the date

    of enactment of the Dodd-Frank Act for agricultural commodities.

    B. Regulatory Framework

    1. ``Agricultural Commodity'' in Current Regulations

    The term agricultural commodity appears in the Commission's

    regulations in multiple places, the most relevant of which are the

    rules for swaps and options.

    a. Part 35 Swaps Exemption

    Regarding the pre Dodd-Frank Act swaps rules, Part 35 of the

    Commission's regulations provides a broad-based exemption for certain

    swap agreements. Adopted by the Commission under its Sec. 4(c)

    exemptive authority in 1993,\26\ Part 35 allows for swaps to transact

    bilaterally if certain conditions are met.\27\ As mentioned above, the

    CFMA swaps exemption, current CEA Sec. Sec. 2(d), 2(g) and 2(h),

    provided an even broader exemption for excluded and exempt commodities

    than that provided by Part 35. As a result, only swap transactions in

    agricultural commodities still rely on the exemption found in Part 35.

    With the exception of three outstanding Sec. 4(c) exemptions related

    to cleared agricultural basis and calendar swaps,\28\ Part 35 is the

    sole authority under which market participants may transact

    agricultural swaps that are not options--until such

    [[Page 65589]]

    time as the Commission issues other or different rules and regulations

    for agricultural swaps transactions.\29\

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    \26\ See 58 FR 5587 (Jan. 22, 1993). Note that because Part 35

    was implemented pursuant to a Sec. 4(c) exemption, agricultural

    swaps that rely on Part 35 for their legal authority will continue

    to be permitted under the Dodd-Frank language whereby existing

    agricultural swaps provisions adopted pursuant to Sec. 4(c),

    including Part 35, are grandfathered (See Dodd-Frank Sec.

    723(c)(3)(B)).

    \27\ The requirements are: (1) The swap agreements are entered

    into solely between eligible swap participants; (2) the swap

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

    standardized as to their material economic terms; (3) the

    creditworthiness of any party having an actual or potential

    obligation under the swap agreement must be a material consideration

    in entering into or determining the terms of the swap agreement,

    including pricing, cost, or credit enhancement terms; and (4) the

    swap agreement is not entered into and traded on or through a

    multilateral transaction execution facility. See id. at 5590-5591;

    see also 17 CFR 35.2(a)-(d).

    \28\ Part 35, at Sec. 35.2(d), also provides that ``any person

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

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

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

    conditions as the Commission deems appropriate, including but not

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

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

    Part 35, which have in each instance been styled as Sec. 4(c)

    exemptive orders. See:

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

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

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

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

    Certain Floor Brokers and Traders To Be Eligible Swap Participants;

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

    Permitting Certain Customer Positions in the Foregoing Swaps and

    Associated Property To Be Commingled With Other Property Held in

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

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

    Act, Permitting the Chicago Mercantile Exchange to Clear Certain

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

    of the Commodity Exchange Act, Permitting Customer Positions in Such

    Cleared-Only Contracts and Associated Funds To Be Commingled With

    Other Positions and Funds Held in Customer Segregated Accounts, 74

    FR 12316 (March 24, 2009); and

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

    Act, Permitting the Kansas City Board of Trade Clearing Corporation

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

    Section 4d of the Commodity Exchange Act, Permitting Customer

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

    Commingled With Other Positions and Funds Held in Customer

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

    \29\ See Agricultural Swaps, Advance Notice of Proposed

    Rulemaking and Request for Comment, 75 FR 59666 (September 28, 2010)

    (the ``Agricultural Swaps ANPRM'').

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    b. Part 32 and Options

    The Commission maintains plenary authority over commodity options

    pursuant to CEA Sec. 4c(b). It has used that authority to, among other

    things, issue Part 32 of the Commission's regulations, which includes a

    general ban on off-exchange options.\30\ However, Part 32 allows for

    off-exchange option transactions under certain conditions, including

    allowing off-exchange options on agricultural commodities in two

    instances.\31\

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    \30\ See Commission regulation 32.11, 17 CFR 32.11.

    \31\ Note that Part 32 was not issued under the Commission's

    Sec. 4(c) exemptive authority. After the effective date of the

    Dodd-Frank Act, options on agricultural commodities will also fall

    under the Dodd-Frank Act's provisions governing the trading of swaps

    (and, specifically, agricultural swaps) since options on commodities

    will fall within the CEA's definition of a swap. Accordingly, it is

    important to identify what options on agricultural commodities are

    currently being traded pursuant to Part 32.

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    Rule 32.13 establishes rules for trading off-exchange options on

    the ``enumerated'' agricultural commodities (``agricultural trade

    options'' or ``ATOs'') whereby ATOs may only be sold by an Agricultural

    Trade Option Merchant (``ATOM''), who must first register with the

    Commission as such pursuant to CFTC rule 3.13. Since its 1998 adoption

    and one amendment in 1999,\32\ the ATOM registration scheme has

    attracted only one registrant, which registrant has since withdrawn its

    ATOM registration. Accordingly, ATOs currently may only be transacted

    pursuant to an exemptive provision found at Sec. 32.13(g)(1). The

    exemption at Sec. 32.13(g)(1) allows ATOs 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.

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    \32\ 63 FR 18821 (April 16, 1998); and 64 FR 68011 (December 6,

    1999), respectively.

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    In either case (whether transacted pursuant to the ATOM

    registration scheme or accomplished via the ATO exemption at Sec.

    32.13(g)), the phrase ``agricultural trade option'' refers specifically

    to an off-exchange option on an enumerated agricultural commodity.

    In addition to the Sec. 32.13(g) ATO exemption, Part 32 includes,

    at Sec. 32.4, a basic trade option exemption applicable to options on

    commodities other than the enumerated agricultural commodities. The

    terms of the Sec. 32.4 exemption are essentially the same as those of

    the Sec. 32.13(g) exemption with one significant difference. Under

    Sec. 32.4, the 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. However, Sec. 32.4 does not include any net

    worth requirement. Because the term ``agricultural commodity'' in the

    Act refers to more than just the enumerated commodities, the Commission

    recognizes that certain options authorized under Sec. 32.4 (e.g. off-

    exchange options on coffee, sugar, cocoa, and other agricultural

    products that do not appear in the enumerated commodity list) will be

    considered to be swaps in an agricultural commodity--and subject to any

    Commission rules that specifically address agricultural swaps.

    c. Other Regulations

    The definition of agricultural commodity will also apply to any

    other Commission regulation that references agricultural commodity and

    is not specifically limited to the enumerated agricultural

    commodities.\33\ However, the definition is not anticipated to have any

    significant substantive impact outside of the Part 35 swaps rules, the

    Part 32 options rules, and the position limit rulemaking that will

    address agricultural commodities (see discussion in next section).

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

    \33\ For example, see current Commission regulation 150.5(e)(3)

    (17 CFR 150.5(e)(3)), which applies to exchange-set speculative

    position limits for, among other things, the ``international soft

    agricultural products.'' Section 150.5 may be amended when the

    Commission adopts position limits for agricultural commodities

    pursuant to Sec. 737(a) of the Dodd-Frank Act.

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

    2. ``Agricultural Commodity'' in New CFTC Regulations

    The definition of agricultural commodity will also be necessary in

    order to provide context for certain rulemakings under the Dodd-Frank

    Act. For example, if the Commission proceeds with an agricultural swaps

    rulemaking, the definition will identify the scope of commodities that

    will be subject to it.\34\ Any such rulemaking would provide rules and

    regulations governing the trading of swaps in an agricultural

    commodity. The definition will similarly provide a basis for the

    Commission's planned rulemaking addressing speculative position limits

    on agricultural commodities,\35\ and by reverse implication,

    speculative position limits on exempt commodities (defined as a

    commodity that is not an excluded commodity or an agricultural

    commodity)--i.e., once a definition of agricultural commodity is

    adopted, any commodity that does not fall within that definition, or

    the definition of excluded commodity, will be considered an exempt

    commodity.\36\

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

    \34\ See Sec. Sec. 723(c)(3) and 733 of the Dodd-Frank Act and

    the Agricultural Swaps ANPRM.

    \35\ See Sec. 737(a) of the Dodd-Frank Act.

    \36\ Id.

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

    Similarly, defining an agricultural commodity could clarify those

    swaps that are eligible for the exemptions in current CEA Sec. 2(g)

    and 2(h) (which are not available to swaps in agricultural

    commodities). As noted above, the Dodd-Frank Act provides for the

    eventual repeal of current CEA Sec. 2(g) and Sec. 2(h). However, if

    the definition of an agricultural commodity is made effective prior to

    the repeal of those provisions, it would provide greater certainty as

    to the proper scope of those provisions during the interim.

    Part II--Explanation of the Definition

    A. Terms of the Proposed Definition

    This notice of proposed rulemaking proposes to add the following

    definition to section 1.3, the Definitions section, of the Commission's

    regulations:

    As used in the Act and CFTC regulations, the term ``agricultural

    commodity'' means:

    (1) The following commodities specifically enumerated in the

    definition of a ``commodity'' found in section 1a of the Act: Wheat,

    cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums,

    mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool,

    wool tops, fats and oils (including lard, tallow, cottonseed oil,

    peanut oil, soybean oil and all other fats and oils), cottonseed

    meal, cottonseed, peanuts, soybeans, soybean meal, livestock,

    livestock products, and frozen concentrated orange juice, but not

    onions;

    (2) All other commodities that are, or once were, or are derived

    from, living organisms, including plant, animal and aquatic life,

    which are generally fungible, within their respective classes, and

    are used primarily for human food, shelter, animal feed, or natural

    fiber;

    (3) Tobacco, products of horticulture, and such other

    commodities used or consumed by animals or humans as the Commission

    may by rule, regulation, or order designate after notice and

    opportunity for hearing; and

    (4) Commodity-based contracts based wholly or principally on a

    single underlying agricultural commodity.

    B. Explaining the Definition

    Category One--Enumerated Agricultural Commodities

    Category one includes the ``enumerated agricultural commodities''

    [[Page 65590]]

    specified in current Sec. 1a(4) of the Act (renumbered as Sec. 1a(9)

    under the Dodd-Frank Act). While there is considerable overlap between

    categories one and two, category one includes some commodities that

    would not qualify under category two. For example, ``fats and oils''

    would include plant-based oils, such as tung oil and linseed oil, which

    are used solely for industrial purposes (and thus would not fall within

    category two). Section 1a(4)'s reference to ``oils'' would not,

    however, extend to petroleum products.\37\

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

    \37\ Petroleum products clearly would not fall within the

    enumerated commodities. ``These itemized commodities are

    agricultural in nature.'' Philip McBride Johnson, Commodities

    Regulation, Sec. 1.01, p. 3 (1982). The Commission has never even

    considered treating petroleum products as agricultural commodities.

    Nor would petroleum products fall within the second category. Even

    though they could be viewed as derived from living organisms--albeit

    organisms that lived millions of years ago--such products would not

    qualify under the ``used primarily for human food, shelter, animal

    feed or natural fiber'' standard of category two.

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

    Category Two: Operative Definition of Agricultural Commodities

    As a general matter, category 2 seeks to draw a line between

    products derived from living organisms that are used for human food,

    shelter, animal feed or natural fiber (covered by the definition) and

    products that are produced through processing plant or animal-based

    inputs to create products largely used as industrial inputs (outside

    the definition). In that context, some of the terms used in describing

    the second category require further clarification, particularly the

    terms, ``generally fungible,'' ``used primarily,'' ``human food'' and

    ``natural fiber.''

    ``Generally fungible''--means substitutable or interchangeable

    within general classes. For example, apples, coffee beans, and cheese

    are generally fungible within general classes, even though there are

    various grades and types, and so they would be agricultural

    commodities. On the other hand, commodities that have been processed

    and have taken on a unique identity would not be generally fungible.

    Thus, while flax or mohair are generally fungible natural fibers, lace

    and linen garments made from flax, or sweaters made from mohair, are

    not generally fungible and would not be agricultural commodities under

    category two.

    ``Used primarily''--means any amount of usage over 50%. If 50% of

    the peaches harvested, plus one, are used for human food, then peaches

    fall within category two.

    ``Human food''--includes drink. Thus fruit juice, wine and beer are

    ``food'' for purposes of the definition of ``agricultural commodity.''

    ``Natural fiber''--means any naturally occurring fiber that is

    capable of being spun into a yarn or made into a fabric by bonding or

    by interlacing in a variety of methods including weaving, knitting,

    braiding, felting, twisting, or webbing, and which is the basic

    structural element of textile products.

    Based on the foregoing, therefore, category two would include such

    products as: Fruits and fruit juices; vegetables and edible vegetable

    products; edible products of enumerated commodities, such as wheat

    flour and corn meal; poultry; milk and milk products, including cheese,

    nonfat dry milk and dry whey; distiller's dried grain; eggs; cocoa

    beans, cocoa butter and cocoa; coffee beans and ground coffee;

    sugarcane, sugar beets, beet pulp (used as animal feed), raw sugar,

    molasses and refined sugar; honey; beer and wine; shrimp; and silk,

    flax and mohair.

    Category two would also include stud lumber, plywood, strand board

    and structural panels because they are derived from living organisms

    (trees), are generally fungible (e.g., random length 2 x 4s and 4 x 8

    standard sheets of plywood) and are used primarily for human shelter--

    i.e., in the construction of dwellings. Category two would not,

    however, include industrial inputs such as wood pulp, paper or

    cardboard, nor would it include raw rubber, turpentine or rosin.

    Although derived from living organisms--trees--and generally fungible,

    none of these products are used primarily for human food, shelter,

    animal feed or natural fibers. On the other hand, maple syrup and maple

    sugar, also derived from trees, would be ``agricultural commodities.''

    Rayon, which is a fiber derived from trees or other plants, falls out

    of category two because it is not a natural fiber--i.e., it must be

    chemically processed from cellulose before it becomes fiber.

    Category two would include high fructose corn syrup, but not corn-

    based products such as polylactic acid (a corn derivative used in

    biodegradable packaging), butanol (a chemical derived from cornstarch

    and used in plasticizers, resins, and brake fluid) or other plant-based

    industrial products. Category two would include pure ethanol, which is

    derived from living organisms (corn and other plants), is generally

    fungible, and may be used for human food (as an ingredient of alcoholic

    beverages). However, it would not include denatured ethanol, which is

    used for fuel and for other industrial uses, because denatured ethanol

    cannot be used for human food. Likewise, neither would Category 2

    include other plant or animal based renewable fuels, such as methane or

    biodiesel. Fertilizer and other agricultural chemicals, even though

    they are used almost exclusively in agriculture, would not fall within

    the definition because they would not fit into the food, shelter,

    animal feed or natural fiber category.

    Category Three--Other Agricultural Commodities

    Category three would include commodities that do not readily fit

    into the first two categories, but would nevertheless be widely

    recognized as commodities of an agricultural nature. Such commodities

    would include, for example, tobacco, products of horticulture (e.g.,

    ornamental plants), and such other commodities used or consumed by

    animals or humans as the Commission may by rule, regulation or order

    designate after notice and opportunity for hearing. The Commission

    would determine the status of any such other commodities for purposes

    of the Act and CFTC regulations on a case-by-case basis as questions

    arise in the context of specific markets or transactions.

    Category Four--Commodity-Based Contracts

    The term, ``agricultural commodity,'' also covers contracts that

    are based wholly or principally on a single underlying agricultural

    commodity. Such contracts do not necessarily involve the potential for

    physical delivery of the underlying agricultural commodity--for example

    basis swaps, calendar swaps or crop yield swaps. The commodity-based

    contracts category would also include an index based wholly or

    principally on a single underlying agricultural commodity. Thus, for

    example, the Minneapolis Grain Exchange (``MGE'') wheat, corn and

    soybean price index contracts \38\ would be considered agricultural

    commodities. Also, any index made up of more than 50% of any single

    agricultural commodity, since it is based principally on a single

    underlying agricultural commodity, would be considered a commodity-

    based contract for purposes of including it within the agricultural

    commodity definition.

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

    \38\ The MGE agricultural index products are currently available

    for corn, soybeans, and various types of wheat. These index products

    are financially settled to a spot index of country origin pricing as

    calculated by a firm called Data Transmission Network (``DTN'').

    Cash settlement is based upon the simple average of the spot prices

    published on the last three trading days of the settlement month.

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

    For purposes of the commodity-based contract category, the soybean

    complex

    [[Page 65591]]

    would be considered a single commodity, so that an index based on the

    prices of soybeans, soybean meal and soybean oil would be an

    agricultural commodity under this provision. Likewise, for purposes of

    this provision, wheat would be considered a single commodity, so that

    an index based on the prices of Chicago Board of Trade (``CBT'') soft

    red winter wheat, Kansas City Board of Trade (``KCBT'') hard red winter

    wheat and MGE hard red spring wheat would be an agricultural commodity

    under the commodity-based contract provision.

    On the other hand, a contract based on an index of the prices of

    multiple agricultural commodities would not be based wholly or

    principally on a single agricultural commodity and would not fall

    within the commodity-based contract category. Thus, for example, under

    the commodity-based contract provision, a swap contract based on a

    price index of equal parts wheat, corn and soybeans, or even a swap

    based on a price index of 50% corn and 50% wheat, would not be based

    wholly or principally on a single underlying agricultural commodity and

    so would not fall within the agricultural commodity definition.

    Therefore, such index-based swaps would not be subject to special rules

    (if any) that might be adopted for agricultural commodity swaps.\39\

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

    \39\ See the Agricultural Swaps ANPRM.

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

    The definition of an ``excluded commodity'' in current CEA Sec.

    1a(13)(iii) \40\ could be read to include any index of agricultural

    commodities. That definition provides that ``excluded commodity''

    means, among other things, ``any economic or commercial index based on

    prices, rates, values, or levels that are not within the control of any

    party to the relevant contract, agreement, or transaction.'' However,

    such a reading would frustrate the requirement in Dodd-Frank that swaps

    in agricultural commodities be permitted only pursuant to a Sec. 4(c)

    order of the Commission. For example, a swap contract based on a price

    index of solely wheat should reasonably be considered as a swap in

    agricultural commodity. Applying a mechanical interpretation of the

    definition of excluded commodity could permit ``gaming'' by allowing an

    index based principally, or even overwhelmingly, on one agricultural

    commodity to evade the limitations on trading agricultural swaps that

    are found in the Dodd-Frank Act. For this reason, the definition

    proposed herein would include an index based wholly or principally on a

    single underlying agricultural commodity.

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

    \40\ New Sec. 1a(19)(iii) as renumbered under the Dodd-Frank

    Act.

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

    Onions

    Onions present a unique case in that onions are the only

    agricultural product specifically excluded from the enumerated

    commodities list in current Sec. 1a(4). Also, Public Law 85-839

    prohibits the trading of onion futures on any board of trade in the

    United States.\41\ Nothing in the definition proposed herein affects

    the prohibition on onion futures trading.

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

    \41\ 7 U.S.C. 13-1.

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

    In defining an agricultural commodity, given the foregoing

    statutory history, as well as the Act's grammatical construction, it

    would appear that ``agricultural commodity'' is a subset of

    ``commodity'' and, since onions are excluded from the definition of

    ``commodity,'' onions cannot be considered an ``agricultural

    commodity.'' However, under the Dodd-Frank Act, the definition of

    ``swap'' in new Sec. 1a(47) of the CEA is not limited to transactions

    based upon ``commodities'' as defined in current Sec. 1a(4) of the

    Act. Therefore, under the CEA as amended by Dodd-Frank, a swap may be

    based upon an item that is not defined as a ``commodity.'' Thus, onion

    swaps would seem to be permissible, but would not be considered to be

    swaps in an ``agricultural commodity'' under the definition proposed

    herein.

    C. Effects of Applying the Definition

    It is also important to consider the uses to which the definition

    will be put--i.e., what would be the practical effect of a commodity

    being classified as an ``agricultural commodity'' under the definition

    proposed herein? One effect is that the commodity would be covered by

    any rules the Commission ultimately adopts for agricultural swaps. If,

    based on the comments received on the Agricultural Swaps ANPRM,\42\ it

    is determined that agricultural swaps should be treated the same as

    other physical commodity swaps, the definition will have no effect in

    the agricultural swaps context.

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

    \42\ See Agricultural Swaps, Advance Notice of Proposed

    Rulemaking and Request for Comment, 75 FR 59666 (September 28,

    2010).

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

    The other significant effect of a commodity being classified as an

    ``agricultural commodity'' is that the commodity would be subject to

    the speculative position limits for agricultural commodities,\43\

    rather than the speculative limits for exempt commodities. Again, the

    classification of a given commodity as ``agricultural'' vs. ``exempt''

    should have no practical effect on the commodity or how it is traded in

    the speculative limits context because: (1) The definition will only

    apply to commodities that are the subject of actual swaps or futures

    trading; and (2) the speculative limits for any such commodities will

    be based not on any general across-the-board definition or principle,

    but on the individual characteristics of each commodity, its swaps/

    futures market and its underlying cash market.

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

    \43\ The Commission is required to adopt speculative position

    limits for agricultural commodities within 270 days of the adoption

    of the Dodd-Frank Act.

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

    Also, as noted above, during the interim period until Sec. Sec.

    2(g) and 2(h) are repealed, any commodities falling within the new

    ``agricultural commodity'' definition could not legally be traded

    pursuant to either section (although Part 35 would still be available

    to commodities/contracts meeting its requirements).

    Part III--Request for Comments Regarding the Proposed Definition

    The Commission requests comments on any aspect of the agricultural

    commodity definition proposed herein, and also on the following

    specific questions:

    (1) Are there any commodities that do not fit within the terms of

    the definition proposed herein, but which nevertheless should be

    considered to be ``agricultural commodities'' for purposes of the CEA

    and Commission regulations? If so, why, and what undesirable effects,

    if any, might result from omitting such commodities from the

    definition?

    (2) Are there any commodities that do fit within the terms of the

    definition proposed herein, but which nevertheless should not be

    considered to be ``agricultural commodities'' for purposes of the CEA

    and Commission regulations? If so, why, and what undesirable effects,

    if any, might result from including such commodities in the definition?

    (3) Does the definition's proposed treatment of commodity-based

    contracts, including index contracts, for purposes of the agricultural

    commodity definition constitute an appropriate mechanism for

    classifying such contracts? If not, what other treatment would be a

    better alternative?

    (4) Are biofuels, such as methane and biodiesel, appropriately

    excluded from the agricultural commodity definition? If not, why should

    such products be included in the definition and what undesirable

    effects, if any, might result from omitting them from the definition?

    (5) Under the proposed definition, lumber, plywood and other

    products of

    [[Page 65592]]

    trees used in human shelter would fall within the agricultural

    commodity definition, whereas products of trees used as industrial

    inputs, such as wood pulp, paper, raw rubber and turpentine, would fall

    outside the definition. Does this formulation draw an appropriate

    dividing line between the products of trees that are covered by the

    agricultural commodity definition and those that are not?

    (6) As noted above, if the definition of an agricultural commodity

    is made effective upon the publication of a final rule, it would

    provide clarity as to what swaps are or are not eligible for the

    exemptions found in current CEA Sec. Sec. 2(g) and 2(h) until the

    point at which their repeal by the Dodd-Frank Act becomes effective. Is

    there any reason not to make the definition of agricultural commodity

    effective upon the publication of a final rule? Are there swaps

    currently being transacted under Sec. 2(g) or Sec. 2(h) that would be

    considered transactions in an agricultural commodity (and thus

    potentially, temporarily illegal) under the definition proposed herein?

    If so, should the effective date of the definition be postponed until

    the repeal of current CEA Sec. Sec. 2(g) and 2(h), for all purposes

    other than for the setting of speculative position limits, which will

    become effective prior to the repeal?

    Part IV--Related Matters

    A. Paperwork Reduction Act

    The proposed rule will not impose any new recordkeeping or

    information collection requirements, or other collections of

    information that require approval of the Office of Management and

    Budget under the Paperwork Reduction Act.\44\ The Commission invites

    public comment on the accuracy of its estimate that no additional

    recordkeeping or information collection requirements or changes to

    existing collection requirements would result from the rules proposed

    herein.

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

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

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

    B. Cost Benefit Analysis

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

    costs and benefits of its actions before issuing new regulations under

    the Act. Section 15(a) does not require the Commission to quantify the

    costs and benefits of new regulations or to determine whether the

    benefits of adopted regulations outweigh their costs. Rather, section

    15(a) requires the Commission to consider the costs and benefits of the

    subject regulations in light of five broad areas of market and public

    concern: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness, and financial integrity of the market for

    listed derivatives; (3) price discovery; (4) sound risk management

    practices; and (5) other public interest considerations. The Commission

    may, in its discretion, give greater weight to any one of the five

    enumerated areas of concern and may, in its discretion, determine that,

    not withstanding its costs, a particular regulation is necessary or

    appropriate to protect the public interest.

    Defining an agricultural commodity for purposes of the CEA would

    seem to have limited immediate practical effects. However, the

    definition will be necessary for later substantive rulemakings, such as

    setting speculative position limits for exempt and agricultural

    commodities under Sec. 737 of the Dodd-Frank Act and determining the

    permissibility of trading agricultural swaps under Sec. 723(c)(3) and

    Sec. 733 of the Dodd-Frank Act. Accordingly, this analysis will focus

    on the prospective costs/benefits of defining ``agricultural

    commodity.''

    As noted above, Sec. 737(a) of the Dodd-Frank Act amends CEA Sec.

    4a(a) to direct the Commission to adopt speculative position limits for

    futures, exchange-traded options, and swaps that are economically

    equivalent to futures and exchange-traded options within 180 days of

    the date of enactment of the Dodd-Frank Act for exempt commodities and

    within 270 days of the date of enactment of the Dodd-Frank Act for

    agricultural commodities. Under CEA Sec. 4a(a)(3), the Commission in

    setting position limits must balance the goals of: (1) Diminishing,

    eliminating, or preventing excessive speculation; (2) deterring and

    preventing market manipulation, squeezes, and corners; (3) ensuring

    sufficient liquidity for bona fide hedgers; and (4) ensuring that the

    price discovery function of the underlying market is not disrupted. If

    speculative position limits for exempt and agricultural commodities are

    set at an inappropriate level, it could have the consequence of not

    achieving the optimum blend of these important goals and could be

    detrimental to the competitiveness and financial integrity of these

    markets.

    As noted above, Sec. 723(c)(3) of the Dodd-Frank Act contains a

    general rule that ``no person shall offer to enter into, or confirm the

    execution of, any swap in an agricultural commodity (as defined by the

    [CFTC]).'' Section 723(c)(3) contains an exception to that general rule

    that provides that a swap in an agricultural commodity may be permitted

    pursuant to the Commission's exemptive authority under CEA Sec. 4(c),

    ``or any rule, regulation, or order issued thereunder (including any

    rule, regulation, or order in effect as of the date of enactment of

    this Act) by the [CFTC] to allow swaps under such terms and conditions

    as the Commission shall prescribe.''

    Also as noted above, Sec. 733 of the Dodd-Frank Act adds a new

    Sec. 5h to the CEA that governs the registration and regulation of

    swap execution facilities. New CEA Sec. 5h(b)(2) provides that a swap

    execution facility ``may not list for trading or confirm the execution

    of any swap in an agricultural commodity (as defined by the Commission)

    except pursuant to a rule or regulation of the Commission allowing the

    swap under such terms and conditions as the Commission shall

    prescribe.''

    Both Sec. 723 and Sec. 733 require the Commission to define an

    agricultural commodity if agricultural swaps (beyond those currently

    allowed under CEA Sec. 4(c) exemptions) are to be traded. If the

    Commission decides to promulgate a rule permitting additional types of

    agricultural swaps to trade, such a rule could enhance price discovery

    and improve risk management for the agricultural commodities involved.

    The Commission invites public comments on its cost-benefit

    considerations. Commenters also are invited to submit any data or other

    information that they may have quantifying or qualifying the costs and

    benefits of the proposal with their comment letters.

    C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \45\ requires that

    agencies consider whether the rules they propose will have a

    significant economic impact on a substantial number of small entities

    and, if so, provide a regulatory flexibility analysis respecting the

    impact. The rules proposed by the Commission provide a definition that

    will largely be used in future rulemakings and which, by itself,

    imposes no significant new regulatory requirements. Accordingly, the

    Chairman, on behalf of the Commission, hereby certifies pursuant to 5

    U.S.C. 605(b) that the proposed rules will not have a significant

    impact on a substantial number of small entities.

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

    \45\ 5 U.S.C. 601 et seq.

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

    List of Subjects in 17 CFR Part 1

    Definitions, Agriculture, Agricultural commodity.

    In consideration of the foregoing, and pursuant to the authority

    contained in

    [[Page 65593]]

    the Commodity Exchange Act and, in particular, sections 2(a)(1), 5h,

    and 8a thereof, 7 U.S.C. 2, 7b-3, and 12a, and pursuant to the

    authority contained in section 723(c)(3) of the Dodd-Frank Wall Street

    Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376

    (2010), the Commission hereby proposes to amend Chapter 1 of Title 17

    of the Code of Federal Regulations as follows:

    PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 is revised to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a-6p, 7, 7a, 7b, 7b-3, 8, 9,

    12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24, unless

    otherwise noted.

    2. Section 1.3 is amended by adding paragraph (zz) to read as

    follows:

    Sec. 1.3 Definitions.

    * * * * *

    (zz) Agricultural commodity. As used in the Act and CFTC

    regulations, this term means:

    (1) The following commodities specifically enumerated in the

    definition of a ``commodity'' found in section 1a of the Act:Wheat,

    cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill

    feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool

    tops, fats and oils (including lard, tallow, cottonseed oil, peanut

    oil, soybean oil and all other fats and oils), cottonseed meal,

    cottonseed, peanuts, soybeans, soybean meal, livestock, livestock

    products, and frozen concentrated orange juice, but not onions;

    (2) All other commodities that are, or once were, or are derived

    from, living organisms, including plant, animal and aquatic life, which

    are generally fungible, within their respective classes, and are used

    primarily for human food, shelter, animal feed or natural fiber;

    (3) Tobacco, products of horticulture, and such other commodities

    used or consumed by animals or humans as the Commission may by rule,

    regulation or order designate after notice and opportunity for hearing;

    and

    (4) Commodity-based contracts based wholly or principally on a

    single underlying agricultural commodity.

    Issued in Washington, DC, on October 19, 2010, by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    Statement of Chairman Gary Gensler

    Agriculture Commodity Definition

    October 19, 2010

    I support the proposal to publish for comment a definition of the term,

    ``agricultural commodity.'' This is necessary as the Dodd-Frank Act

    includes two provisions that apply to swaps in an agricultural

    commodity, as defined by the CFTC. First, the definition will be used

    to fulfill the Dodd-Frank Act's requirement that swaps in an

    ``agricultural commodity'' be prohibited unless permitted under the

    Commission's general exemptive authority. An Advance Notice of Proposed

    Rulemaking seeking comment on the appropriate conditions, restrictions

    or protections to be included in any rules governing agricultural swaps

    is currently out for comment. Second, the Dodd-Frank Act directs the

    Commission to adopt speculative position limits for ``agricultural

    commodities'' within 270 days of the enactment of Dodd-Frank.

    I believe the proposed agricultural commodity definition draws a good

    line between agricultural and non-agricultural commodities, though I am

    very interested to hear the public's views on this definition.

    [FR Doc. 2010-26951 Filed 10-25-10; 8:45 am]

    BILLING CODE P

    Last Updated: October 26, 2010