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, [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.
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).
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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
[[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