Federal Register, Volume 76 Issue 240 (Wednesday, December 14, 2011)[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]
[Rules and Regulations]
[Pages 77670-77672]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-31355]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AD64
Retail Commodity Transactions Under Commodity Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretation; Request for comments.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is issuing this interpretation of the term ``actual
delivery'' as set forth in section 2(c)(2)(D)(ii)(III)(aa) of the
Commodity Exchange Act (``CEA'') pursuant to section 742(a) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. The
Commission requests comment on whether this interpretation accurately
construes the statutory language. In the event that comments
demonstrate a need to modify this interpretation, the Commission will
take appropriate action.
DATES: Effective December 14, 2011. Comments must be received by
February 13, 2012.
ADDRESSES: Comments, identified by RIN number, may be sent by any of
the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Hand Delivery/Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel,
Division of Enforcement, (312) 596-0538, [email protected], or Martin
B. White, Assistant General Counsel, Office of the General Counsel,
(202) 418-5129, [email protected], Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
All comments must be submitted in English, or, if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the Commission to consider
information that may be exempt from disclosure under the Freedom of
Information Act (``FOIA''),\1\ a petition for confidential treatment of
the exempt information may be submitted according to the established
procedures in Sec. 145.9 of the CFTC's regulations.\2\ The Commission
reserves the right, but shall have no obligation, to review, prescreen,
filter, redact, refuse, or remove any or all of your submission from
http://www.cftc.gov that it may deem to be inappropriate for
publication, such as obscene language. All submissions that have been
redacted or removed that contain comments on the merits of the
rulemaking will be retained in the public comment file and will be
considered as required under the Administrative Procedure Act and other
applicable laws, and may be accessible under FOIA.
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\1\ 5 U.S.C. 552.
\2\ 17 CFR 145.9.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ Title VII
of the Dodd-Frank Act \4\ amended the Commodity Exchange Act (``CEA'')
\5\ to establish a comprehensive new regulatory framework for swaps and
security-based swaps. The legislation was enacted to reduce risk,
increase transparency, and promote market integrity within the
financial system by, among other things: (1) Providing for the
registration and comprehensive regulation of swap dealers and major
[[Page 77671]]
swap participants; (2) imposing clearing and trade execution
requirements on standardized derivative products; (3) creating robust
recordkeeping and real-time reporting regimes; and (4) enhancing the
Commission's rulemaking and enforcement authorities with respect to,
among others, all registered entities and intermediaries subject to the
Commission's oversight.
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\3\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). The text of
the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
\4\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\5\ 7 U.S.C. 1 et seq.
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In addition, section 742(a) of the Dodd-Frank Act amends section
2(c)(2) of the CEA to add a new subparagraph, section 2(c)(2)(D) of the
CEA,\6\ entitled ``Retail Commodity Transactions.'' New CEA section
2(c)(2)(D) provides the Commission with a new source of jurisdiction
over certain retail commodity transactions.\7\ Congress enacted this
provision following court decisions, including CFTC v. Zelener,\8\ that
narrowly interpreted the term ``contract of sale of a commodity for
future delivery''--the statutory term for a futures contract--based on
language in customer agreements. Zelener involved retail foreign
currency transactions that were characterized as spot sales in contract
documents, but in which, in practice, customer positions were held open
indefinitely and customers never took delivery of foreign currency.\9\
Zelener held that the transactions were not subject to CFTC
jurisdiction because they did not involve futures contracts but were
``in form, spot sales for delivery within 48 hours.'' \10\ In so
ruling, the court focused solely on the language of the customer
agreements.
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\6\ 7 U.S.C. 2(c)(2)(D).
\7\ The jurisdictional grant provided to the Commission by new
CEA section 2(c)(2)(D) is in addition to, and independent from, the
jurisdiction over contracts of sale of a commodity for future
delivery and transactions subject to regulation pursuant to CEA
section 19 that the CEA has historically granted to the Commission.
The jurisdictional grant provided by new CEA section 2(c)(2)(D) is
also in addition to, and independent from, the jurisdiction over
swaps granted to the Commission by the Dodd-Frank Act.
\8\ 373 F.3d 861 (7th Cir. 2004); see also CFTC v. Erskine, 512
F.3d 309 (6th Cir. 2008).
\9\ 373 F.3d at 863-64.
\10\ Id. at 868-69.
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Following Zelener, Congress provided the Commission with additional
authority over retail foreign currency transactions in the CFTC
Reauthorization Act of 2008.\11\ Similarly, in section 742(a) of the
Dodd-Frank Act, Congress provided the Commission with additional
authority over non-foreign currency retail commodity transactions by
making specified forms of these transactions subject to certain
provisions of the CEA regardless of whether they involve a ``contract
of sale of a commodity for future delivery.'' Senator Lincoln explained
the rationale for this legislation during floor debate on the Dodd-
Frank Act:
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\11\ Food, Conservation and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651 (2008).
[the] contracts [in Zelener] function just like futures contracts,
but the court of appeals, * * * based on the wording of the contract
documents, held them to be spot contracts outside of CFTC
jurisdiction. The CFTC Reauthorization Act of 2008, which was
enacted as part of that year's Farm Bill, clarified that such
transactions in foreign currency are subject to CFTC anti-fraud
authority. It left open the possibility, however, that such Zelener-
type contracts could still escape CFTC jurisdiction if used for
other commodities such as energy and metals.
Section 742 corrects this by extending the Farm Bill's ``Zelener
fraud fix'' to retail off-exchange transactions in all commodities.
Further, a transaction with a retail customer that meets the
leverage and other requirements set forth in Section 742 is subject
not only to the anti-fraud provisions of CEA Section 4b (which is
the case for foreign currency), but also to the on-exchange trading
requirement of CEA Section 4(a), ``as if'' the transaction was a
futures contract.\12\
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\12\ 156 Cong. Rec. S5,924 (daily ed. July 15, 2010) (statement
of Sen. Lincoln); see also Hearing to Review Implications of the
CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities
and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52-
664 (2009) (``In 2004 the Seventh Circuit Court made a decision in
the CFTC v. Zelener [case]. It adopted a narrow definition of the
term `transactions for future delivery.' What it held is that a 3-
day contract offered to retail customers for foreign currency that
on its face promised delivery was not a futures contract and was,
therefore, outside the CFTC's jurisdiction. This was even though the
contracts operated in practice as futures contracts. Following the
Zelener decision, many [fraudsters] were given a roadmap to evade
CFTC jurisdiction and to scam customers or consumers.'') (statement
of Hon. Leonard L. Boswell, United States Representative and
Chairman, Subcommittee on General Farm Commodities and Risk
Management); (``What we are talking about here though is expanding
the--well, correcting would be the argument the Zelener
interpretation of what a futures contract is. If in substance it is
a futures contract, it is going to be regulated. It doesn't matter
how clever your draftsmanship is.'') (statement of Hon. Jim
Marshall, United States Representative).
Accordingly, new CEA section 2(c)(2)(D) broadly applies to any
agreement, contract, or transaction in any commodity that is entered
into with, or offered to (even if not entered into with), a non-
eligible contract participant or non-eligible commercial entity on a
leveraged or margined basis, or financed by the offeror, the
counterparty, or a person acting in concert with the offeror or
counterparty on a similar basis.\13\ New CEA section 2(c)(2)(D) further
provides that such an agreement, contract, or transaction shall be
subject to CEA sections 4(a),\14\ 4(b),\15\ and 4b \16\ ``as if the
agreement, contract, or transaction was a contract of sale of a
commodity for future delivery.'' \17\
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\13\ 7 U.S.C. 2(c)(2)(D)(i).
\14\ 7 U.S.C. 6(a).
\15\ 7 U.S.C. 6(b).
\16\ 7 U.S.C. 6b.
\17\ 7 U.S.C. 2(c)(2)(D)(iii).
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New CEA section 2(c)(2)(D) excepts certain transactions from its
application. In particular, new CEA section 2(c)(2)(D)(ii)(III)(aa)
\18\ excepts a contract of sale that ``results in actual delivery
within 28 days or such other longer period as the Commission may
determine by rule or regulation based upon the typical commercial
practice in cash or spot markets for the commodity involved.'' \19\
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\18\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).
\19\ The Commission has not adopted any regulations permitting a
longer actual delivery period for any commodity pursuant to new CEA
section 2(c)(2)(D)(ii)(III)(aa). Accordingly, the 28-day actual
delivery period set forth in this provision remains applicable to
all commodities.
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The Commission is issuing this interpretation to inform the public
of the Commission's views as to the meaning of the term ``actual
delivery'' as used in new CEA section 2(c)(2)(D)(ii)(III)(aa) and to
provide the public with guidance on how the Commission intends to
assess whether any given transaction results in actual delivery within
the meaning of the statute.\20\ The Commission requests comment on
whether its interpretation of ``actual delivery'' accurately construes
the statutory language.
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\20\ In 1985, the Commission's Office of General Counsel issued
a staff interpretation determining whether certain hypothetical
precious metals transactions would be subject to regulation under
the CEA. Interpretive Letter 85-2, Bank Activities Involving the
Sale of Precious Metals (CFTC Office of General Counsel Aug. 6,
1985), Comm. Fut. L. Rep. (CCH) ] 22,673 (``Letter 85-2''). Letter
85-2 opined on whether the hypothetical transactions would
constitute leverage contracts, as defined by 17 CFR 31.4(w), or
contracts of sale of a commodity for future delivery, as that term
is used in CEA section 2(a)(1)(A). Letter 85-2 is not relevant to a
determination of whether ``actual delivery'' has occurred within the
meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa) for several
reasons, including, but not limited to, the following: (1) Letter
85-2 predates new CEA section 2(c)(2)(D) by approximately 26 years
and therefore does not purport to construe new CEA section
2(c)(2)(D); (2) to the extent Letter 85-2 assumes the occurrence of
delivery of a commodity, it does not purport to determine whether
``actual delivery'' has occurred under new CEA section
2(c)(2)(D)(ii)(III)(aa); and (3) new CEA section 2(c)(2)(D)(iii)
explicitly subjects certain retail commodity transactions to CEA
sections 4(a), 4(b), and 4b ``as if'' they were contracts of sale of
a commodity for future delivery, regardless of whether they are, in
fact, contracts of sale of a commodity for future delivery under CEA
section 2(a)(1)(A).
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This interpretation does not address the meaning or scope of new
CEA section 2(c)(2)(D)(ii)(III)(bb) \21\ or any exception to new CEA
section 2(c)(2)(D) other than new CEA section 2(c)(2)(D)(ii)(III)(aa).
Similarly, this
[[Page 77672]]
interpretation does not address the meaning or scope of contracts of
sale of a commodity for future delivery, the forward contract exclusion
from the term ``future delivery'' set forth in CEA section 1a(27),\22\
or the forward contract exclusion from the term ``swap'' set forth in
CEA section 1a(47)(B)(ii).\23\ Nor does this interpretation alter any
statutory interpretation or statement of Commission policy relating to
the forward contract exclusion.\24\
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\21\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(bb).
\22\ 7 U.S.C. 1a(27).
\23\ 7 U.S.C. 1a(47)(B)(ii).
\24\ See, e.g., Statutory Interpretation Concerning Forward
Transactions, 55 FR 39188 (Sept. 25, 1990) (``Brent
Interpretation'').
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II. Commission Interpretation of ``Actual Delivery''
In the view of the Commission, the determination of whether
``actual delivery'' has occurred within the meaning of new CEA section
2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding
delivery beyond the four corners of contract documents. This
interpretation of the statutory language is based on Congress's use of
the word ``actual'' to modify ``delivery'' and on the legislative
history of new CEA section 2(c)(2)(D)(ii)(III)(aa) described above.
Consistent with this interpretation of the statutory language, in
determining whether actual delivery has occurred within 28 days, the
Commission will employ a functional approach and examine how the
agreement, contract, or transaction is marketed, managed, and
performed, instead of relying solely on language used by the parties in
the agreement, contract, or transaction. This approach best
accomplishes Congress's intent when it enacted section 742(a) of the
Dodd-Frank Act and gives full meaning to Congress's term ``actual
delivery.''
Relevant factors in this determination include the following:
ownership, possession, title, and physical location of the commodity
purchased or sold, both before and after execution of the agreement,
contract, or transaction; the nature of the relationship between the
buyer, seller, and possessor of the commodity purchased or sold; and
the manner in which the purchase or sale is recorded and completed. The
Commission provides the following examples to illustrate how it will
determine whether actual delivery has occurred within the meaning of
new CEA section 2(c)(2)(D)(ii)(III)(aa).
Example 1: Actual delivery will have occurred if, within 28
days, the seller has physically delivered the entire quantity of the
commodity purchased by the buyer, including any portion of the
purchase made using leverage, margin, or financing, into the
possession of the buyer and has transferred title to that quantity
of the commodity to the buyer.
Example 2: Actual delivery will have occurred if, within 28
days, the seller has physically delivered the entire quantity of the
commodity purchased by the buyer, including any portion of the
purchase made using leverage, margin, or financing, whether in
specifically segregated or fungible bulk form, into the possession
of a depository other than the seller and its parent company,
partners, agents, and other affiliates, that is: (a) A financial
institution as defined by the CEA; (b) a depository, the warrants or
warehouse receipts of which are recognized for delivery purposes for
any commodity on a contract market designated by the Commission; or
(c) a storage facility licensed or regulated by the United States or
any United States agency, and has transferred title to that quantity
of the commodity to the buyer.\25\
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\25\ Based on Examples 1 and 2, an agreement, contract, or
transaction that results in ``physical delivery'' within the meaning
of section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code
would ordinarily result in ``actual delivery'' under new CEA section
2(c)(2)(D)(ii)(III)(aa), absent other evidence indicating that the
purported delivery is a sham. See Model State Commodity Code Sec.
1.04(a)(2)(i)-(iii), Comm. Fut. L. Rep. Archive (CCH) ] 22,568 (Apr.
5, 1985). Conversely, an agreement, contract, or transaction that
does not result in ``physical delivery'' within the meaning of
section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code is
highly unlikely to result in ``actual delivery'' under new CEA
section 2(c)(2)(D)(ii)(III)(aa).
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Example 3: Actual delivery will not have occurred if, within 28
days, a book entry is made by the seller purporting to show that
delivery of the commodity has been made to the buyer and/or that a
sale of a commodity has subsequently been covered or hedged by the
seller through a third party contract or account, but the seller has
not, in accordance with the methods described in Example 1 or 2,
physically delivered the entire quantity of the commodity purchased
by the buyer, including any portion of the purchase made using
leverage, margin, or financing, and transferred title to that
quantity of the commodity to the buyer, regardless of whether the
agreement, contract, or transaction between the buyer and seller
purports to create an enforceable obligation on the part of the
seller, or a parent company, partner, agent, or other affiliate of
the seller, to deliver the commodity to the buyer.
Example 4: Actual delivery will not have occurred if, within 28
days, the seller has purported to physically deliver the entire
quantity of the commodity purchased by the buyer, including any
portion of the purchase made using leverage, margin, or financing,
in accordance with the method described in Example 2, and transfer
title to that quantity of the commodity to the buyer, but the title
document fails to identify the specific financial institution,
depository, or storage facility with possession of the commodity,
the quality specifications of the commodity, the identity of the
party transferring title to the commodity to the buyer, and the
segregation or allocation status of the commodity.
Example 5: Actual delivery will not have occurred if, within 28
days, an agreement, contract, or transaction for the purchase or
sale of a commodity is rolled, offset, or otherwise netted with
another transaction or settled in cash between the buyer and the
seller, but the seller has not, in accordance with the methods
described in Example 1 or 2, physically delivered the entire
quantity of the commodity purchased by the buyer, including any
portion of the purchase made using leverage, margin, or financing,
and transferred title to that quantity of the commodity to the
buyer, regardless of whether the agreement, contract, or transaction
between the buyer and seller purports to create an enforceable
obligation on the part of the seller, or a parent company, partner,
agent, or other affiliate of the seller, to deliver the commodity to
the buyer.
Issued in Washington, DC, on December 1, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2011-31355 Filed 12-13-11; 8:45 am]
BILLING CODE P
Last Updated: December 14, 2011