25320 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

1 17 CFR 145.9. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 3, 32, and 33 

RIN 3038–AD62 

Commodity Options 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule and interim final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is issuing a final rule to repeal 

and replace the Commission’s current 

regulations concerning commodity 

options. The Commission is also issuing 

an interim final rule (with a request for 

additional comment) that incorporates a 

trade option exemption into the final 

rules for commodity options (added 

§ 32.3). For a transaction to be within 

the trade option exemption, the option, 

the offeror (seller), and the offeree 

(buyer), as applicable, must satisfy 

certain eligibility requirements, 

including that the option, if exercised, 

be physically settled, that the option 

seller meet certain eligibility 

requirements, and that the option buyer 

be a commercial user of the commodity 

underlying the option, and certain other 

regulatory conditions. Only comments 

pertaining to the interim final rule will 

be considered in any further action 

related to these rules. 

DATES: Effective date: The effective date 

for this final rule and the interim final 

rule June 26, 2012. 

Comment date: Comments on § 32.3, 

the interim final rule portion of this 

document, must be received on or 

before June 26, 2012. 

Compliance date: For compliance 

dates for these final rules, see 

SUPPLEMENTARY INFORMATION at section 

IV(D), below. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD62, 

by any of the following methods: 

• Agency Web site, via its Comments 

Online process: http:// 

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Mail: David A. Stawick, Secretary of 

the Commission, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

• Courier: Same as mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

Please submit your comments using 

only one method. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http:// 

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the CFTC 

to consider information that you believe 

is exempt from disclosure under the 

Freedom of Information Act, a petition 

for confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the CFTC’s regulations.1

The CFTC 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 this 

action will be retained in the public 

comment file and will be considered as 

required under the Administrative 

Procedure Act and other applicable 

laws, and may be accessible under the 

Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Donald Heitman, Senior Special 

Counsel, (202) 418–5041, 

dheitman@cftc.gov, Division of Market 

Oversight; Ryne Miller, Attorney 

Advisor, (202) 418–5921, 

rmiller@cftc.gov, Division of Market 

Oversight; or David Aron, Counsel, 

(202) 418–6621, daron@cftc.gov, Office 

of the General Counsel, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Introduction 

A. Dodd-Frank Act 

B. Notice of Proposed Rulemaking— 

February 3, 2011; Final Rule and Interim 

Final Rule 

II. Commodity Options Background 

A. Commission’s Plenary Statutory 

Authority Over Commodity Options 

B. The NPRM Proposed an Overhaul of 

Existing Commodity Options Regulations 

III. Comments on the Commodity Options 

Proposal in the NPRM 

A. Request for Comment on the NPRM 

B. Summary of Comments on the NPRM 

1. General Overview 

2. Comments on the Commodity Options 

Proposal 

a. Whether the Definition of Swap Includes 

Commodity Options 

b. Trade Option Exemption 

c. Eligible Contract Participants and Trade 

Options 

d. FERC-Regulated Transactions 

e. Deleting the Dealer Option Provisions 

f. Deleting the Agricultural Trade Option 

Provisions 

g. Options Fraud Provisions 

IV. Explanation of the Final Rule and Interim 

Final Rule for Commodity Options 

A. Introduction 

B. Sections Unchanged From the NPRM 

C. New Part 32 

1. Final Rule 

2. Interim Final Rule; Trade Option 

Exemption 

a. Exemption From General Swaps Rules 

b. Offeror 

c. Offeree 

d. Physical Commodity Option 

e. Trade Option Exemption Conditions 

i. Recordkeeping Pursuant to Part 45 

ii. Reporting Pursuant to Part 45 

iii. Annual Notice Filing Alternative to Part 

45 Reporting; Form TO 

iv. Specific Request for Comment on Trade 

Option Reporting and/or Notice Filing 

Requirements 

v. Swaps Large Trader Reporting; Position 

Limits 

vi. SD/MSP Conditions 

vii. Enforcement Provisions 

viii. General Exemptive Authority Retained 

D. Effective Date; Compliance Date 

V. Interim Final Rule Matters 

VI. Request for Comment on Interim Final 

Rule 

VII. Related Matters 

A. Cost Benefit Considerations 

1. Background 

2. Statutory Mandate To Consider the Costs 

and Benefits of the Commission’s Action: 

CEA Section15(a) 

3. Benefits and Costs of the Final Rule 

a. Benefits 

b. Costs 

4. Interim Final Rule Benefits and Costs 

a. Benefits 

b. Costs 

c. Costs and Benefits as Compared to 

Alternatives 

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

and Interim Final Rule as a Whole) 

a. Protection of Market Participants and the 

Public 

b. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

c. Price Discovery 

d. Sound Risk Management Procedures 

e. Other Public Interest Considerations 

6. Request for Comment on CBC in 

Connection With Interim Final Rule 

B. Regulatory Flexibility Analysis 

1. DCMs, DCOs, FCMs, CPOs, Large 

Traders, ECPs, and ESPs 

2. SDs, MSPs, SEFs, and SDRs 

3. Entities Eligible To Engage in Options on 

Physical Commodities on DCMs Under 

Part 33 

4. Entities Engaged in Options Under 

§ 32.13(g) 

5. Entities Engaged in Options Under 

existing § 32.4 

C. Paperwork Reduction Act 

VIII. Final Rule and Interim Final Rule 

I. Introduction 

A. Dodd-Frank Act 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25321 

2See 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. 

3Pursuant to section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

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

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

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

definition excludes options on futures (which must 

be traded on a DCM pursuant to part 33 of the 

Commission’s regulations) (see CEA section 

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

options on physical commodities (whether or not 

traded on a DCM) (see CEA section 1a(47)(A)(i), 7 

U.S.C. 1a(47)(A)(i)). Other options excluded from 

the statutory definition of swap are options on any 

security, certificate of deposit, or group or index of 

securities, including any interest therein or based 

on the value thereof, that is subject to the Securities 

Act of 1933 and the Securities Exchange Act of 

1934 (see CEA section 1a(47)(B)(iii), 7 U.S.C. 

1a(47)(B)(iii)) and foreign currency options entered 

into on a national securities exchange registered 

pursuant to section 6(a) of the Securities Exchange 

Act of 1934 (see CEA section 1a(47)(B)(iv), 7 U.S.C. 

1a(47)(B)(iv)). Note also that the Commission’s 

regulations define a commodity option transaction 

or commodity option as ‘‘any transaction or 

agreement in interstate commerce which is or is 

held out to be of the character of, or is commonly 

known to the trade as, an ‘option,’ ‘privilege,’ 

‘indemnity,’ ‘bid,’ ‘offer,’ ‘call,’ ‘put,’ ‘advance 

guaranty’ or ‘decline guaranty’.’’ 17 CFR 1.3(hh). 

For purposes of this release, the Commission uses 

the term ‘‘commodity options’’ to apply solely to 

commodity options not excluded from the swap 

definition set forth in CEA section 1a(47)(A), 7 

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

detail below, the Commission is undertaking a 

definitions rulemaking in conjunction with the 

Securities and Exchange Commission (‘‘SEC’’) to 

further define, among other things, the term 

‘‘swap.’’ See Further Definition of ‘‘Swap,’’ 

‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap 

Agreement’’; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping, 76 FR 29818, May 23, 

2011 (‘‘Product Definitions NPRM’’). The final rule 

and interpretations that result from the Product 

Definitions NPRM will address the determination of 

whether a commodity option or a transaction with 

optionality is subject to the swap definition in the 

first instance. If a commodity option or a 

transaction with optionality is excluded from the 

scope of the swap definition, as further defined by 

the Commission and the SEC, the final rule and/or 

interim final rule adopted herein are not applicable. 

7Commodity Options and Agricultural Swaps, 76 

FR 6095, Feb. 3, 2011. Note that in addition to 

proposed commodity options rules, the NPRM also 

included proposed rules for agricultural swaps. The 

agricultural swaps rules were adopted by the 

Commission via a final rulemaking published on 

August 10, 2011 and are not addressed herein. See 

Agricultural Swaps, 76 FR 49291, Aug. 10, 2011 

(‘‘Final Agricultural Swaps Rules’’). 

8See note 6, above. 

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

10Public Law 93–463, October 23, 1974. 

11 17 CFR part 32. 

12 17 CFR part 33. 

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

one of the authorizing statutory provisions for 

original part 35, entitled ‘‘Exemption of Swap 

Agreements.’’ See Exemption of Swap Agreements, 

58 FR 5587, at 5589, Jan. 22, 1993 (noting that: ‘‘In 

enacting this exemptive rule, the Commission is 

Continued 

(‘‘Dodd-Frank Act’’).2 Title VII of the 

Dodd-Frank Act 3 amended the 

Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’) 4 to establish a comprehensive 

new regulatory framework for swaps 

and security-based swaps. The 

legislation was enacted to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system by, among other things: (1) 

Providing for the registration and 

comprehensive regulation of swap 

dealers (‘‘SDs’’) and major swap 

participants (‘‘MSPs’’); (2) imposing 

clearing and trade execution 

requirements on standardized derivative 

products; (3) creating robust 

recordkeeping and real-time reporting 

regimes; and (4) enhancing the 

Commission’s rulemaking and 

enforcement authorities with respect to, 

among others, all registered entities and 

intermediaries subject to the 

Commission’s oversight. 

B. Notice of Proposed Rulemaking— 

February 3, 2011; Final Rule and 

Interim Final Rule 

Section 721 of the Dodd-Frank Act 

added new section 1a(47) to the CEA, 

defining ‘‘swap’’ to include not only 

‘‘any agreement, contract, or transaction 

commonly known as,’’ among other 

things, ‘‘a commodity swap,’’ 5 but also 

‘‘[an] option of any kind that is for the 

purchase or sale, or based on the value, 

of 1 or more * * * commodities 

* * *.’’ 6 As a result of the Dodd-Frank 

changes, on February 3, 2011, the 

Commission published in the Federal 

Register a notice of proposed 

rulemaking (‘‘NPRM’’) that included 

proposed regulations for commodity 

options.7 This final rule and interim 

final rule relates to the commodity 

options proposal in the NPRM. In 

particular, the final rule issued herein 

adopts the Commission’s proposal to 

generally permit market participants to 

trade commodity options, which are 

statutorily defined as swaps,8 subject to 

the same rules applicable to every other 

swap. The interim final rule adopted 

herein includes a trade option 

exemption for physically delivered 

commodity options purchased by 

commercial users of the commodities 

underlying the options, subject to 

certain conditions. This final rule and 

interim final rule also renumbers the 

commodity options rules, as compared 

to the proposal in the NPRM, and 

deletes a provision from the proposed 

rules that the Commission has 

determined is no longer relevant. 

As noted above, because the DoddFrank Act definition of swap includes 

commodity options, the NPRM 

proposed provisions that would 

substantially amend the Commission’s 

regulations regarding such commodity 

option transactions. The proposed rules 

for commodity options, including 

proposed amendments to parts 3, 32, 

and 33, generally included provisions 

that would have subjected all 

commodity options that are swaps to the 

same rules applicable to any other swap. 

After thoroughly reviewing the 

comments submitted in response to the 

NPRM, the Commission has determined 

to issue the commodity options rules 

proposed in the NPRM as final rules, 

with certain non-substantive 

amendments, including the deletion of 

a ‘‘prompt execution’’ requirement and 

other requirements that are no longer 

relevant, as well as minor formatting 

updates (e.g., renumbering). In addition, 

and in response to the commenters, this 

final rulemaking also includes an 

interim final rule relating to trade 

options, as discussed in detail below. 

II. Commodity Options Background 

A. Commission’s Plenary Statutory 

Authority Over Commodity Options 

The CEA provides: 

No person shall offer to enter into, enter 

into or confirm the execution of, any 

transaction involving any commodity 

regulated under this chapter which is of the 

character of, or is commonly known to the 

trade as, an ‘‘option’’, ‘‘privilege’’, 

‘‘indemnity’’, ‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, 

‘‘advance guaranty’’, or ‘‘decline guaranty’’, 

contrary to any rule, regulation, or order of 

the Commission prohibiting any such 

transaction or allowing any such transaction 

under such terms and conditions as the 

Commission shall prescribe. Any such order, 

rule, or regulation may be made only after 

notice and opportunity for hearing, and the 

Commission may set different terms and 

conditions for different markets.9

Through this provision, Congress has 

given the Commission jurisdiction and 

plenary rulemaking authority over all 

commodity option transactions. 

Notably, while the Dodd-Frank Act 

included numerous amendments to the 

CEA, the plenary options authority 

provision in CEA section 4c(b) was not 

amended or otherwise altered by the 

Dodd-Frank Act. Rather, CEA section 

4c(b) has been in the Act in 

substantially the same form since it was 

added by the Commodity Futures 

Trading Commission Act of 1974.10 The 

Commission has primarily used its 

options authority to promulgate the 

commodity options rules in parts 32 

(Regulation of Commodity Option 

Transactions) 11 and 33 (Regulation of 

Domestic Exchange-Traded Commodity 

Option Transactions) 12 of the existing 

regulations, as well as to support the 

adoption of the swaps rules in part 35.13

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25322 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

also acting under its plenary authority under 

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

agreements that may be regarded as commodity 

options.’’). In addition, when the Commission 

recently repealed original part 35 and replaced it 

with new part 35, entitled ‘‘Agricultural Swaps,’’ 

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

authorizing statutory provisions. See Final 

Agricultural Swaps Rules, 76 FR at 49295–49296, 

n.36, Aug. 10, 2011 (‘‘The Commission is clarifying 

now that the new part 35, which will apply only 

to swaps in agricultural commodities, is similarly 

adopted pursuant to the authorities found in CEA 

sections 4(c) and 4c(b).’’). 

14See note 6, above. 15Those existing rules encompassed primarily 

parts 32 and 33, but also original part 35, which 

was a general swap exemption applicable to, among 

other things, commodity options that did not 

qualify for the trade option exemption. 

16 In some cases, the pre Dodd-Frank commodity 

options rules are inconsistent with certain DoddFrank Act provisions, such as the lack of a 

requirement in pre Dodd-Frank § 32.4 (17 CFR 32.4) 

that counterparties to trade options be eligible 

contract participants (‘‘ECPs’’). In contrast, section 

2(e) of the CEA, 7 U.S.C. 2(e), as amended by the 

Dodd-Frank Act, requires that counterparties to all 

swaps not conducted on or subject to the rules of 

a designated contract market be ECPs. 

17See NPRM, 76 FR 6095, at 6097–6098; 6101– 

6103, Feb. 3, 2011. 

18The Commission’s regulations are set forth in 

title 17 of the CFR. 

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

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

explained in note 7, above, the proposals in the 

NPRM related to part 35 and agricultural swaps 

have already been adopted by the Commission as 

final rules. 

21See note 6, above. 

22The public comment file for the NPRM is 

available at: http://comments.cftc.gov/ 

PublicComments/CommentList.aspx?id=968. This 

comment summary references each of the 

comments that substantively addressed the 

commodity options proposal in the NPRM, whether 

submitted in response to the original NPRM, in 

response to the Commission’s general reopening of 

the comment period for multiple Dodd-Frank rule 

proposals (See Reopening and Extension of 

Comment Periods for Rulemakings Implementing 

the Dodd-Frank Wall Street Reform and Consumer 

Protection Act, 76 FR 25274, May 4, 2011 (‘‘DoddFrank General Reopening’’)), or in response to the 

joint CFTC and SEC Product Definitions NPRM. 

Note that none of the comments submitted in 

response to Dodd-Frank General Reopening 

specifically addressed the commodity options 

proposal in the NPRM, and so they are not 

discussed in detail herein. In addition, certain 

comments submitted on this rulemaking may also 

be addressed by the final rule implementing the 

proposals in the Product Definitions NPRM. 

Finally, the public comment file for the NPRM also 

includes multiple comments that did not directly 

address the commodity options proposal (for 

example, see the comments from Majed El Zein, B.J. 

D’Milli, Maryknoll Office for Global Concerns, 

Maryknoll Fathers and Brothers, J.C. Hoyt, and Jon 

Pike), other comments that only addressed the 

proposed agricultural swaps rules, and four records 

of meetings or communications between 

Commission staff and interested industry groups. 

B. The NPRM Proposed an Overhaul of 

Existing Commodity Options 

Regulations 

As explained in the introduction, the 

Dodd-Frank Act includes a definition of 

swap that encompasses commodity 

options.14 The Commission proposed 

the commodity options rules in the 

NPRM to address the fact that the 

existing rules applicable to commodity 

options 15 pre-date the Dodd-Frank Act 

provisions applicable to all other swaps 

and, therefore, do not consider or 

incorporate such provisions.16

Therefore, the rules in the NPRM would 

have amended part 32 to essentially 

permit commodity options to trade 

subject to the same rules applicable to 

any other swap. The NPRM contains a 

detailed description of the historical 

development of part 32 and the 

proposed changes.17 The NPRM also 

includes proposed updates to part 33, 

which currently applies to any option 

traded on a designated contract market 

(‘‘DCM’’) (whether an option on a future 

or an option on a physical). In order to 

place all options that are swaps under 

a single part of title 17 of the Code of 

Federal Regulations (‘‘CFR’’),18 the 

NPRM proposed to remove from part 33 

any reference to an ‘‘option on a 

physical,’’ 19 leaving part 33 applicable 

only to exchange-traded options on 

futures, and allowing part 32 to serve as 

the sole relevant regulation for all other 

commodity options (including both 

exchange-traded options on physical 

commodities and all off-exchange 

commodity options). In addition, the 

NPRM proposed repealing the swap 

exemption in original part 35 and 

replacing it with rules for agricultural 

swaps pursuant to Dodd-Frank’s 

mandate that agricultural swaps only be 

permitted pursuant to rules set by the 

Commission.20

Under the NPRM, proposed new part 

32 would have governed all commodity 

options that fall under the Dodd-Frank 

swap definition 21 by permitting such 

commodity options to be transacted 

subject to the same laws and rules 

applicable to any other swap—without 

distinguishing between trade options 

and non-trade options. An additional 

element of new part 32, as proposed in 

the NRPM, was the elimination of the 

historical distinction between the 

treatment of options on the enumerated 

agricultural commodities and options 

on all other commodities. As proposed 

in the NPRM, new part 32 would treat 

options on both enumerated and nonenumerated agricultural commodities 

the same as all other commodity 

options. Finally, the NPRM included, at 

proposed § 32.5, a grandfather clause 

providing that ‘‘[n]othing contained in 

this part shall be construed to affect any 

lawful activities prior to the effective 

date of this part.’’ That grandfather 

provision is retained unaltered in this 

final rule. 

III. Comments on the Commodity 

Options Proposal in the NPRM 

A. Request for Comment on the NPRM 

In the NPRM, the Commission 

requested specific input on the 

following questions related to the 

commodity options proposal: 

• Generally, will the rule changes and 

amendments proposed herein provide 

an appropriate regulatory framework for 

the transacting of trade options on all 

commodities? 

• Regarding the proposed revisions to 

part 32, and specifically the revised 

§ 32.4 trade option exemption, will such 

revisions significantly affect hedging 

opportunities available to currently 

active users of the trade options market? 

In other words, is there any reason not 

to revise § 32.4 as proposed? In 

particular, are there persons who offer 

or purchase trade options on nonenumerated agricultural commodities 

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

§ 32.4 who would not qualify as ECPs 

and would therefore be ineligible to 

participate in such options under 

revised § 32.4? If so, should such 

participants be excepted from the 

general requirement that all swaps 

participants must be ECPs unless the 

transaction takes place on a DCM? 

• Regarding the proposed withdrawal 

of § 32.12 (the dealer option provision) 

in its entirety, would such action (in 

conjunction with the adoption of the 

new rules proposed herein) prejudice or 

otherwise harm any person, group of 

persons, or class of transactions? In 

other words, is there any reason not to 

withdraw § 32.12 as proposed? 

• Similarly, and regarding the 

proposed withdrawal of § 32.13 (the 

agricultural trade option provision) in 

its entirety, would such action (in 

conjunction with the adoption of the 

new rules proposed herein) prejudice or 

otherwise harm any person, group of 

persons, or class of transactions? In 

other words, is there any reason not to 

withdraw § 32.13 as proposed? 

• Do the proposals as they relate to 

part 33 appropriately limit the scope of 

part 33 to DCM-traded options on 

futures, leaving DCM-traded options on 

physical commodities subject to part 

32? 

• Do the proposals outlined herein 

omit or fail to appropriately consider 

any other areas of concern regarding 

options in any commodity? 

B. Summary of Comments on the NPRM 

1. General Overview 

Approximately 39 comment letters 

were submitted that substantively 

addressed the NPRM,22 representing a 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25323 

23See Product Definitions NPRM, 76 FR 29818, 

May 23, 2011. The Commission notes that, where 

applicable, the definitions-based comments are also 

being considered in conjunction with its effort, 

jointly with the SEC, to further define certain 

products, including the term ‘‘swap,’’ pursuant to 

§ 712(d) of the Dodd-Frank Act. 

24As discussed below, the NGSA & NCGA letter 

supported, in the alternative, multiple different 

approaches to their end goal of exempting or 

excluding physically settled commodity options 

from swap regulation. 

broad range of interests, including 

agricultural producers, merchants, SDs, 

commodity funds, futures industry 

organizations, academics and think 

tanks, a U.S. government agency, and 

private individuals. Twenty-one 

different commenters, through various 

letters, specifically addressed the 

commodity options proposal. 

Commodity options comments on the 

NPRM were filed by entities including: 

The Financial Services Roundtable 

(‘‘FSR’’); CME Group, Inc. (‘‘CME 

Group’’ or ‘‘CME’’); Futures Industry 

Association and International Swaps 

and Derivatives Association (‘‘FIA & 

ISDA’’); Edison Electric Institute and 

Electric Power Supply Association 

(‘‘EIA–EPSA’’); National Grain and Feed 

Association (‘‘NGFA’’); staff of the 

Federal Energy Regulatory Commission 

(‘‘FERC Staff’’); American Public Gas 

Association (‘‘APGA’’); Air Transport 

Association of America (‘‘ATA’’); 

Amcot; Coalition of Physical Energy 

Companies (‘‘COPE’’); Gavilon Group, 

LLC (‘‘Gavilon’’), which submitted two 

letters; a joint letter from National Rural 

Electric Cooperative Association, 

American Public Power Association, 

and Large Public Power Council 

(together, the ‘‘Power Coalition’’); 

Working Group of Commercial Energy 

Firms (‘‘Energy Working Group’’); 

Commodity Markets Council (‘‘CMC’’); 

Hess Corporation (‘‘Hess’’); a 

commodity options and agricultural 

swaps working group that includes 

Barclays Capital, Citigroup, Credit 

Suisse Securities (USA) LLC, JPMorgan 

Chase & Co., Morgan Stanley, and Wells 

Fargo & Company (together, 

‘‘Commodity Options and Agricultural 

Swaps Working Group’’); and American 

Gas Association (‘‘AGA’’). Commodity 

options comments filed on the Product 

Definitions NPRM included a joint letter 

from Natural Gas Supply Association 

and National Corn Growers Association 

(‘‘NGSA & NCGA’’); a second letter from 

COPE; a letter from Just Energy Group 

(‘‘Just Energy’’); a letter from American 

Petroleum Institute (‘‘API’’); a second 

letter from the Energy Working Group; 

a letter from BG Americas & Global LNG 

(‘‘BGA’’); and a second letter from the 

Power Coalition. 

2. Comments on the Commodity 

Options Proposal 

The commodity options comments 

generally focused on the following 

substantive areas as they related to the 

commodity options proposal in the 

NPRM. 

a. Whether the Definition of Swap 

Includes Commodity Options 

Multiple commenters expressed the 

opinion that treating options as swaps, 

as set forth in the NPRM, was premature 

and should await the Commission’s 

joint rulemaking with the SEC on the 

further definition of a swap.23 In 

particular, FIA–ISDA expressed the 

opinion that the definitions rulemaking 

‘‘is the proper place to address whether 

physical commodity options of any 

kind, including agricultural commodity 

options, should be treated as swaps’’ 

and thus urged the Commission to defer 

the commodity options rulemaking until 

such time as it issues a final rulemaking 

further defining a swap. See FIA & ISDA 

at 4. Similar sentiments were expressed 

by NextEra, EIA–EPSA, the Power 

Coalition, and the Energy Working 

Group. For example: 

As a threshold matter, the Proposed Rule 

is premature insofar as it would treat options 

on physical commodities as swaps before the 

Commission has even proposed the 

definition of what constitutes a swap 

pursuant to Section 712(d) of the Dodd-Frank 

Act . * * * To avoid inconsistent outcomes 

and ensure consideration of an integrated 

and complete record on transactions to be 

regulated as swaps, the Commission should 

stay this proceeding insofar as it would 

define commodity options as swaps. 

EIA–EPSA at 1–2. 

[T]he Working Group respectfully requests 

that the Commission stay the instant 

proceeding until such time that the 

mandatory final rule further defining the 

term ‘swap’ set forth in new Section 1a(47) 

of the [CEA] is jointly issued by the 

Commission and the [SEC]. Until the full 

scope and application of the definition of 

‘swap’ is known and understood, the 

Working Group is unable to fully evaluate the 

potential implications of the Proposed Rule, 

or comment meaningfully on how the 

proposed regulation of Physical Options 

could ultimately affect its members. 

Energy Working Group at 2. 

Beyond the requests to delay the 

commodity options final rulemaking, 

some commenters disagreed with the 

interpretation that the Dodd-Frank swap 

definition was intended to include all 

commodity options. The following 

comments illustrate this view: 

Simply put, a commodity option is not a 

swap * * * COPE requests that the 

Commission find that, unlike swaptions, 

commodity options are not swaps. 

COPE at 4–5. 

The text and structure of the Dodd-Frank 

Act indicates that Congress only intended to 

include options that require financial 

settlement and other financial products in 

the definition of ‘swap.’ 

Gavilon 4/4/11 letter at 4. 

Physical Options meet the criteria of the 

so-called ‘forward contract exclusion’ under 

section 1a(47)(B)(ii) of the CEA and therefore 

must be excluded from the definition of a 

‘swap’ under section 1a(47). 

NGSA & NCGA letter at 3.24 See also, 

letters from AGA and API. 

The Energy Working Group 

acknowledged that the swap definition 

likely included options, but argued that 

the Commission should take action to 

avoid that result: 

Although Congress included Physical 

Options in the definition of ‘swap,’ it also 

vested the Commission with the statutory 

authority [referencing CEA section 4c(b)] to 

regulate options, including Physical Options, 

in a manner different than swaps. The 

Working Group’s members consider Physical 

Options as distinct from other ‘swaps,’ and 

more akin to physically-settled forward 

contracts, and believe that there are 

substantive policy reasons to treat these types 

of transactions in a similar manner. 

Regulating Physical Options as swaps under 

Title VII of the Act would have a substantial 

negative effect on not only the market for 

such options, but also more broadly on 

physical energy markets and participants in 

such markets that rely on physical energy 

commodities during their normal course of 

business. 

Energy Working Group at 4. 

The Energy Working Group letter 

went on to provide several examples of 

‘‘transactions that energy market 

participants do not historically consider 

options, but nonetheless contain an 

element of optionality * * * and should 

not be regulated as swaps.’’ Their letter 

described contracts called daily natural 

gas calls, wholesale full requirements 

contracts for power, tolling agreements 

in organized wholesale electricity 

markets, physical daily heat rate call 

options, and capacity contracts. See 

Energy Working Group at Exhibit A. 

APGA and ATA also requested that the 

Commission clarify that certain variable 

amount delivery contracts that are 

common in the energy sector be 

excluded from the definition of a swap. 

CMC requested that the Commission 

clarify that certain other types of 

transactions fall within the definition of 

an excluded forward contract rather 

than the definition of a swap. CMC 

specifically commented that cash 

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25After CFTC staff reviewed the ‘‘options to 

redeem’’ with both USDA staff members 

responsible for managing the cotton marketing loan 

program and industry representatives from Amcot 

(an association of US cotton marketing 

cooperatives), the Commission has concluded that 

the ‘‘options to redeem’’ under USDA’s cotton 

marketing loan program constitute the producer’s 

contractual right to repay the marketing loan and 

‘‘redeem’’ the collateral (the cotton), to sell in the 

open market. As such, the ‘‘option’’ to redeem 

cotton under USDA Commodity Credit 

Corporation’s marketing loan program is a standard 

loan repayment term and does not constitute a 

commodity option within the meaning of the CEA 

and CFTC regulations. 

26See Product Definition NPRM, 76 FR at 29827– 

29830, May 23, 2011. 

27See note 6, above. 

28Current 17 CFR 32.4(a) provides: ‘‘* * * the 

[prohibition on off-exchange commodity options 

contained in 17 CFR 32.11] shall not apply to a 

commodity option offered by a person which has 

a reasonable basis to believe that the option is 

offered to a producer, processor, or commercial user 

of, or a merchant handling, the commodity which 

is the subject of the commodity option transaction, 

or the products or by-products thereof, and that 

such producer, processor, commercial user or 

merchant is offered or enters into the commodity 

option transaction solely for purposes related to its 

business as such.’’ 

29See: Further Definition of ‘‘Swap Dealer,’’ 

‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap 

Participant,’’ ‘‘Major Security-Based Swap 

forward contracts with embedded 

options and certain cash transaction 

book-outs should not be treated as 

‘‘swaps.’’ CMC at 1. Amcot requested 

clarification that ‘‘equity trades’’ or 

‘‘options to redeem’’ cotton from the 

U.S. Department of Agriculture’s 

Commodity Credit Corporation 

marketing loan program would not be 

considered swaps.25

Regarding those comments describing 

specific transactions, and in particular 

CMC’s comments, the Commission 

notes that the proposed further 

definition of swap included a 

discussion of the applicability of the 

swap definition to both forwards with 

embedded options and book-out 

transactions.26 The Commission further 

notes that, in response to both the 

NPRM and the Product Definitions 

NPRM, several comments were 

submitted regarding ‘‘volumetric 

options’’ in particular (i.e., optionality 

in a contract settling by physical 

delivery that is used to meet varying 

demand for a commodity). The final 

further definition of the term swap to be 

issued by the Commission and the SEC 

will address the applicability of the 

swap definition (and thus, the 

applicability of this final rule and 

interim final rule) to such volumetric 

options.27

b. Trade Option Exemption 

While the commodity options rules 

proposed in the NPRM would have 

removed the trade option exemption 

that is currently at 17 CFR 32.4,28 the 

vast majority of commenters who 

expressed an opinion on the topic 

supported retaining a trade option 

exemption, in one form or another, for 

options that require physical delivery if 

exercised, and were opposed to treating 

such options as swaps subject to all 

applicable Dodd-Frank swaps regulatory 

requirements. The current trade option 

exemption is an exemption from the 

existing prohibition against offexchange commodity option 

transactions in 17 CFR 32.11. In 

contrast, the commenters requested a 

trade option exemption for the purpose 

of being exempt from (1) the swap 

definition, and/or (2) any final rules that 

would treat commodity options the 

same as any other swap. The following 

statement from Hess Corporation 

illustrates this view that certain options 

should not be regulated as swaps: 

Treating all options, financial and 

physical, as swaps will result in significant 

unintended consequences for Hess and other 

commercial entities that rely on physical 

options to manage their business risk. Hess 

does not believe Congress intended such a 

result. On the contrary, Hess believes that the 

Dodd-Frank Act defines ‘swap’ in a manner 

that plainly distinguishes between financial 

and physical transactions. Accordingly, Hess 

urges the Commission to regulate options in 

a similar manner by excluding options that 

are intended to be physically settled once 

exercised from the definition of ‘swap.’ 

Hess Corporation at 1. Similar 

sentiments were expressed by the Power 

Coalition, the Energy Working Group, 

Gavilon, APGA, ATA, NGSA & NCGA, 

AGA, API, and COPE. For example: 

If the Commission proposes rules to 

discard the ‘trade option exemption,’ it 

should concurrently replace it with a ‘trade 

option exemption for nonfinancial 

commodities’ to the defined term ‘swap.’ 

Power Coalition at 15. 

Gavilon urges the Commission to issue an 

order pursuant to CEA Section 4c(b) that 

allows commercial entities to enter into 

Physical Options subject only to conditions 

that are comparable to the requirements in 

current Part 32.4. 

Gavilon April 4, 2011 letter at 6–7. 

[R]egulation of Physical Options as ‘swaps’ 

would cause serious harm to the natural gas 

and other physical commodity markets, 

without providing significant benefits * * *. 

For these reasons, the Commission must 

recognize, in its final rule, either in the 

definition of a ‘swap’ or by preserving the 

trade option exemption, that Physical 

Options are excluded, or are eligible for 

exemption, from regulation as swaps. 

NGSA & NCGA at 4–5. 

[I]f the Commission determines to move 

forward with the [Options NPRM], it must 

make clear that no physically settled 

agreements are covered [or] included in any 

rule pertaining to swaps. 

COPE at 5. CME expressed the opinion 

that ‘‘[We believe that] Congress did not 

necessarily intend for the Commission 

to treat all options on commodities as 

‘swaps’ * * * but we have no objection 

to this outcome.’’ CME at 3. 

c. Eligible Contract Participants and 

Trade Options 

The energy industry commenters 

expressed concerns regarding the fact 

that treating commodity options as 

swaps would require all trade options 

counterparties to be ECPs—because 

trade options are typically bilateral, offexchange transactions, and CEA section 

2(e) permits only ECPs to transact swaps 

other than on or subject to the rules of 

a DCM. The commenters noted that 

there are many non-ECP market 

participants who currently rely on the 

trade option exemption for option 

transactions in a wide range of 

commodities. For example: 

If the Commission eliminates the ability of 

the NFP Electric End Users to engage in 

energy and energy-related commodity 

options, or conditions the use of such trade 

options on the NFP Electric End Users 

qualifying as eligible contract participants, it 

will have a significant and detrimental effect 

on the NFP Electric End Users’ ability to 

hedge their commercial risk in a cost 

effective way. 

Power Coalition at 14. 

The Commodity Options NOPR states that, 

‘based on its review [of the history of the 

Commission’s development of commodity 

options regulation], the Commission has 

determined that there would be little 

practical effect and no detrimental 

consequences in adopting the proposed 

revisions to the existing commodity options 

regime in part 32.’ [citing NPRM at 76 FR 

6101]. The Coalition disagrees strongly with 

the Commission’s determination * * *. We 

consider the Commission’s Proposed Rule to 

be highly detrimental to the NFP Electric End 

Users’ ability to provide affordable electric 

energy to American businesses and 

consumers. 

Power Coalition at 16. 

Since, in general, market participants must 

meet certain net worth thresholds to qualify 

as an ‘eligible contract participant’ [footnote 

omitted] and many Physical Options used by 

small end users are customized or illiquid 

and thus not traded on exchanges, the ability 

of small end users to transact in Physical 

Options would be limited to on-exchange 

contracts that do not exist or do not match 

their needs. 

NGSA & NCGA at 4. 

Similarly, the FSR pointed out, in a 

comment primarily addressing the 

proposed definition of ECP,29 that there 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25325 

Participant’’ and ‘‘Eligible Contract Participant,’’ 75 

FR 80174, Dec. 21, 2010 (joint rulemaking with 

SEC; the comment period originally closed on 

February 22, 2011, and was extended to June 3, 

2011). 

30See In re Osler, CFTC Docket No. 00–5, 2001 

WL 138975 (CFTC Feb. 15, 2001) (finding options 

fraud in violation of regulations 32.9 and 33.10; ‘‘A 

person acts with scienter if he acts intentionally, or 

with reckless disregard for his duties under the 

Act.’’ (citing Hammond v. Smith Barney Harris 

Upham & Co., [1987–1990 Transfer Binder] Comm. 

Fut. L. Rep. (CCH) ¶ 24,617 at 36,659 (CFTC March 

1, 1990)). 

31See Part 30—Fraud in Connection with 

Commodity Transactions, 40 FR 26504, at 26505 

and note 2, June 24, 1975 (adopting final rules in 

connection with commodity options and certain 

other transactions; ‘‘by adopting rules patterned by 

antifraud provisions that Congress has approved as 

part of the statutory scheme of the Commodity 

Exchange Act [in section 4b], the Commission can 

fairly expect that the courts will adopt a consistent 

and uniform approach to the prevention of 

fraudulent and deceptive acts and practices under 

the Commodity Exchange Act’’). 

32See Suspension of the Offer and Sale of 

Commodity Options, 43 FR 16153, Apr. 17, 1978. 

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

the Commission clarifies that an option on a futures 

contract is an option that, upon exercise, results in 

a futures position. 

34See CEA section 4c(b). 

may be issues with the fact that the 

proposal in the NPRM to modify the 

trade option exemption would eliminate 

the availability of the trade option 

exemption for non-ECPs. See FSR at 26, 

n.18. 

d. FERC-Regulated Transactions 

FERC Staff noted that ‘‘depending on 

how broadly the term ‘swap’ is 

construed, CFTC regulation of swaps 

could lead to inconsistent regulation of 

participants and transactions subject to 

FERC jurisdiction, and in particular the 

organized electricity markets.’’ FERC 

Staff at 1. The energy and electricity 

commenters also expressed concerns 

about the jurisdictional overlap. One 

commenter specifically noted that, 

‘‘[Physical Options] in the natural gas 

market are already subject to certain 

regulatory oversight by [FERC] and state 

public utility commissions with respect 

to price, prudence, and manipulation.’’ 

NGSA & NCGA at 5. 

e. Deleting the Dealer Option Provisions 

FIA–ISDA supported the proposed 

withdrawal of regulation 32.12 

(pertaining to the grandfathering of 

certain dealer options). In particular, 

FIA–ISDA concurred with the 

Commission’s assertion that ‘‘the dealer 

option business has not existed since 

the early 1990s’’ and thus there is no 

longer a need for this grandfathering 

provision. See FIA–ISDA at 6. 

f. Deleting the Agricultural Trade 

Option Provisions 

There was only one comment related 

to eliminating the Agricultural Trade 

Option (ATO) Merchant provisions in 

part 32. Specifically, NGFA supported 

eliminating the provisions, observing: 

[NGFA] long has believed that an effective 

ATO regulatory structure could benefit 

agricultural producers and the agribusinesses 

with which they work to develop marketing 

strategies and market their crops. However, 

the rules in place have been unwieldy and, 

consequently, the ATO merchant registration 

regime has been largely unused * * *. The 

NGFA believes the redefinition of ATOs as 

swaps, subject to conditions under DoddFrank (notably the Eligible Contract 

Participant rules), will result in enhanced 

development and use of products that 

formerly would have been categorized as 

agricultural trade options and a broader range 

of risk management tools. 

NGFA at 2. 

g. Options Fraud Provisions 

The proposed rules for commodity 

options in the NPRM would have 

retained the existing enforcement 

provisions in part 32, i.e., § 32.8 

(‘‘Unlawful representations; execution 

of orders’’) and § 32.9 (‘‘Fraud in 

connection with commodity option 

transactions’’). EEI–EPSA requested a 

modification of § 32.9, regarding fraud 

in connection with commodity option 

transactions, to include a ‘‘requisite 

intent’’ requirement. EEI–EPSA at 11. 

As noted above, in the final rule 

issued herein, the Commission is 

retaining § 32.9 (‘‘Fraud in connection 

with commodity option transactions’’), 

which has been renumbered as § 32.4, 

but not otherwise changed. The 

Commission is not including the 

requisite intent standard requested by 

EEI–EPSA, because it would narrow the 

scienter standard for fraud established 

by Commission precedent, which is 

‘‘intentionally or with reckless 

disregard.’’ 30 Moreover, in first 

promulgating its option fraud 

regulation, the Commission did ‘‘not use 

the concept of willful behavior’’ in the 

regulation text out of concern regarding 

the potential for courts to take a 

restrictive view of the Commission’s 

antifraud authority.31 The final rule 

does not retain § 32.8 (‘‘Unlawful 

representations; execution of orders’’). 

That provision was originally intended 

to apply to the retail over-the-counter 

(‘‘OTC’’) options market. Such retail 

OTC options transactions have been 

prohibited since the adoption of the 

general options prohibition at § 32.11 in 

1978.32 Thus § 32.8 is no longer 

necessary, particularly since the 

violations listed in § 32.8 are either 

irrelevant (in that they apply to 

intermediated transactions, whereas 

trade options are generally principal-toprincipal transactions) or are subsumed 

by the general antifraud rule, or both. 

IV. Explanation of the Final Rule and 

Interim Final Rule for Commodity 

Options 

A. Introduction 

After considering the complete record 

in this matter, including all comments 

to the NPRM, the Commission is now 

adopting and issuing this final rule and 

interim final rule for commodity 

options. Broadly speaking, the final rule 

would implement the commodity 

option rules as proposed in the NPRM, 

whereby commodity options are 

permitted subject to the same rules as 

all other swaps, with additional minor 

revisions to part 32. In addition, the 

interim final rule includes a new trade 

option exemption from certain swaps 

regulations. 

B. Sections Unchanged From the NPRM 

The final rule as it relates to revisions 

to part 3 and to part 33 of the 

Commission’s regulations is the same as 

in the NPRM.33

C. New Part 32 

1. Final Rule 

The Commission is publishing this 

final rule in order to provide increased 

regulatory certainty to market 

participants transacting commodity 

options, along with an interim final rule 

to permit additional public comment on 

a new trade option exemption. The final 

rule issued herein generally adopts the 

commodity options proposal as set forth 

in the NPRM. That is, under this final 

rule, commodity options will be 

permitted to transact subject to the same 

rules applicable to any other swap. This 

general authorization is necessary 

because the Commission’s plenary 

rulemaking authority over commodity 

options provides that: ‘‘[n]o person shall 

offer to enter into, enter into or confirm 

the execution of, any transaction 

involving any commodity regulated 

under this chapter which is [a 

commodity option transaction], contrary 

to any rule, regulation, or order of the 

Commission prohibiting any such 

transaction or allowing any such 

transaction under such terms and 

conditions as the Commission shall 

prescribe.’’ 34 By adopting this final rule, 

the Commission provides the required 

general authorization for commodity 

options that are subject to the swap 

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25326 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

35See note 6, above. 

36This provision is the same antifraud language 

used in part 32 prior to the adoption of this final 

rule and interim final rule. 

37The offeror, sometimes also called the grantor, 

is the seller of a commodity option. 

38The offeree, sometimes also called the grantee, 

is the buyer of a commodity option. 

39For example: Trade options would not 

contribute to, or be a factor in, the determination 

of whether a market participant is an SD or MSP; 

trade options would be exempt from the rules on 

mandatory clearing; and trade options would be 

exempt from the rules related to real-time reporting 

of swaps transactions. The provisions identified in 

this footnote are not intended to constitute an 

exclusive or exhaustive list of the swaps 

requirements from which trade options are exempt. 

40The existing trade option exemption, which the 

interim final rule trade option exemption would 

replace, includes no standards or requirements for 

option offerors. 

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

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

2(c)(2)(C)(i)(II)(bb)(AA)) or cash market practice, to 

be a spot transaction, rather than a forward 

transaction, delivery must occur ‘‘within a 

reasonable time [after the contract is executed] in 

accordance with prevailing cash market practice.’’ 

Regulation of Noncompetitive Transactions 

Executed on or Subject to the Rules of a Contract 

Market, 63 FR 3708, 3711, Jan. 26, 1998 (concept 

release). Delivery under a spot contract usually 

occurs within a few days of the trade date. See 

CFTC Interpretative Letter 98–73, available at 

http://www.cftc.gov/ucm/groups/public/ 

@lrlettergeneral/documents/letter/98-73.pdf 

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

immediate delivery of the product and immediate 

payment for the products are expected on or within 

a few days of the trade date’’ and citing CFTC 

Interpretative Letter No. 97–01, 1996–98 Transfer 

Binder Comm. Fut. L. Rep. (CCH) ¶ 26,937 at p. 

44,520 (December 12, 1996), in turn citing Timothy 

J. Snider, Regulation of the Commodities Futures 

and Options Markets, Vol. 1, § 9.01 (2ed. 1995). 

However, under cash market practices in some 

markets, delivery can occur more than a few days 

after the trade date. See CFTC, Division of Trade 

and Markets: Report on Exchange of Futures for 

Physicals 51, 65, 124–147 (1987) (noting that under 

then-prevailing cash market practices, transactions 

in crude oil and sugar called for delivery in 30 and 

75 days, respectively, while foreign currency spot 

transactions settled in 2 days). 

42See Product Definition NPRM, 76 FR at 29827– 

29830, May 23, 2011. 

definition,35 and removes any 

uncertainty as to whether CEA section 

4c(b) would otherwise prohibit such 

commodity options. 

The remainder of the final rule (i.e., 

everything else in new part 32) largely 

tracks the commodity options language 

proposed in the NPRM, with a few 

minor revisions, including formatting 

and renumbering changes. For example, 

the final rule renumbers the sections of 

new part 32 to delete (rather than 

reserve, as had been proposed in the 

NPRM) the provisions in existing part 

32 that are being deleted. A second 

difference is that the proposal in the 

NRPM would have retained existing 

§ 32.8, entitled ‘‘Unlawful 

representations; execution of orders,’’ 

while this final rule deletes that 

provision, as discussed above. 

Moreover, this commodity options final 

rule retains the strong options antifraud 

language that was proposed in the 

NPRM at § 32.9 (now renumbered as 

§ 32.4).36 In addition, the general 

commodity options authorization, 

proposed as § 32.4 and renumbered 

herein as § 32.2, has been reformatted 

and updated to include a reference to 

the interim final rule, i.e., the new § 32.3 

trade option exemption, which is 

described in detail, below. 

2. Interim Final Rule; Trade Option 

Exemption 

a. Exemption From General Swaps 

Rules 

The interim final rule incorporates a 

new § 32.3 into part 32, providing an 

exemption from certain swaps 

regulations for trade options on exempt 

and agricultural commodities as 

between certain commercial and 

sophisticated counterparties. This trade 

option exemption will operate as an 

alternative to the general commodity 

options authorization in § 32.2. 

Pursuant to the trade option exemption 

issued as an interim final rule herein, if 

the offeror,37 the offeree,38 and the 

characteristics of the option transaction 

meet the requirements of the trade 

option exemption, such option 

transaction will be exempt from the 

general Dodd-Frank swaps regime,39

subject to specified ongoing conditions 

and compliance requirements discussed 

below, as applicable. 

b. Offeror 

Under the terms of the interim final 

rule, the offeror must fall into one of 

two categories. The offeror may be an 

ECP, which assures that option grantors 

will have some minimal level of 

financial resources and sophistication in 

order to minimize the risk that a seller 

would not be able to perform its 

obligations under a commodity 

option.40 Alternatively, the offeror may 

be a producer, processor, or commercial 

user of, or a merchant handling the 

commodity which is the subject of the 

commodity option transaction, or the 

products or by-products thereof, and be 

offering or entering into the transaction 

solely for purposes related to its 

business as such. Because the trade 

option exemption generally is intended 

to permit parties to hedge or otherwise 

enter into transactions for commercial 

purposes, and because certain 

commercial parties prefer to transact 

primarily with other commercial 

parties, the trade option exemption set 

forth in the interim final rule 

specifically authorizes commercials 

who may not be ECPs to act as trade 

option offerors. In either instance, the 

trade option offeror may only offer or 

enter into the contract if it reasonably 

believes, consistent with the standard in 

the existing trade option exemption, 

that the offeree meets the offeree 

requirements specified below. 

c. Offeree 

The offeree must meet the same basic 

requirements as under the existing trade 

option exemption. That is, the option 

buyer must be a producer, processor, or 

commercial user of, or a merchant 

handling the commodity which is the 

subject of the commodity option 

transaction, or the products or byproducts thereof, and be entering into 

the transaction solely for purposes 

related to its business as such. Note that 

there is no ECP requirement or other 

financial eligibility standard for the 

offeree. The purpose of requiring the 

trade option buyer to be a commercial, 

and of not imposing an ECP or other 

financial eligibility standard, is to 

ensure that hedging opportunities for 

commercial entities, for physically 

delivered transactions used for purposes 

related to their business as such, remain 

available regardless of the size or 

sophistication of the commercial entity. 

d. Physical Commodity Option 

The third element of the trade option 

exemption is that both parties must 

intend that the commodity option be 

physically settled, so that, if exercised, 

the option would result in the sale of an 

exempt or agricultural (i.e., nonfinancial) commodity for immediate 

(spot) 41 or deferred (forward) shipment 

or delivery. To assist parties in 

determining whether the sale of the 

exempt or agricultural commodity is 

intended to be physically settled, the 

Commission refers parties to the 

forward contract exclusion guidance as 

provided in the Product Definition 

NPRM,42 or such other guidance as 

ultimately may be adopted in the final 

product definition rulemaking. That is, 

to the extent the obligations that remain 

(or are created) upon the exercise of a 

commodity option are spot transactions 

or fall within the forward contract 

exclusion from the swap definition, 

such commodity option is eligible for 

the trade option exemption. 

e. Trade Option Exemption Conditions 

While the trade option exemption 

issued herein would operate as a general 

exemption from the rules otherwise 

applicable to other swaps (i.e., the 

Dodd-Frank swaps regime), the trade 

option exemption is subject to certain 

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43The Commission recently adopted final swap 

data recordkeeping rules. See Swap Data 

Recordkeeping and Reporting Requirements 77 FR 

2136, at 2198, Jan. 13, 2012. 

44 17 CFR 45.2(h) provides that: [a]ll records 

required to be kept pursuant to this section [17 CFR 

45.2] by any registrant or its affiliates or by any nonSD/MSP counterparty subject to the jurisdiction of 

the Commission shall be open to inspection upon 

request by any representative of the Commission, 

the United States Department of Justice, or the 

[SEC], or by any representative of a prudential 

regulator as authorized by the Commission. Copies 

of all such records shall be provided, at the expense 

of the entity or person required to keep the record, 

to any representative of the Commission upon 

request. Copies of records required to be kept by 

any registrant shall be provided either by electronic 

means, in hard copy, or both, as requested by the 

Commission, with the sole exception that copies of 

records originally created and exclusively 

maintained in paper form may be provided in hard 

copy only. Copies of records required to be kept by 

any non-SD/MSP counterparty subject to the 

jurisdiction of the Commission that is not a 

Commission registrant shall be provided in the 

form, whether electronic or paper, in which the 

records are kept. 

45See 17 CFR 45.8. 

46That is, neither counterparty to the trade option 

has previously reported, as the reporting party, nontrade option swap trading activity during the twelve 

months preceding the date on which the trade 

option is entered into. 

47By taking this approach, the Commission 

ensures that no market participant is compelled to 

comply with part 45’s reporting requirements based 

solely on its trade options activity. 

conditions. The conditions are primarily 

intended to preserve a level of market 

visibility for the Commission while 

reducing the regulatory compliance 

burden for market participants. 

i. Recordkeeping Pursuant to Part 45 

These conditions include a 

recordkeeping requirement for any trade 

options activity, i.e., the recordkeeping 

requirements of 17 CFR 45.2.43 Such 

records must be maintained by all trade 

option participants pursuant to § 45.2 

and made available to the Commission 

as specified therein.44 Section 45.2 

applies different recordkeeping 

requirements, depending on the nature 

of the counterparty. For example, if a 

trade option counterparty is an SD or 

MSP, it would be subject to the 

provisions of § 45.2(a). If a counterparty 

is neither an SD nor an MSP, it would 

be subject to the less stringent 

recordkeeping requirements of § 45.2(b). 

This recordkeeping condition will 

ensure that trade options market 

participants are able to provide 

pertinent information regarding their 

trade options activity to the 

Commission, if requested. 

ii. Reporting Pursuant to Part 45 

In addition to part 45 recordkeeping 

(which applies in some form to all trade 

options and trade option participants), 

the interim final rule requires certain 

trade options to be reported pursuant to 

part 45’s reporting provisions. Under 

the interim final rule, the determination 

as to whether a trade option is required 

to be reported pursuant to part 45 is 

based on the parties to the trade option 

and whether or not they have previously 

reported swaps pursuant to part 45. 

Specifically, if any trade option involves 

at least one counterparty (whether as 

buyer or seller) that has (1) Become 

obligated to comply with the reporting 

requirements of part 45, (2) as a 

reporting party, (3) during the twelve 

month period preceding the date on 

which the trade option is entered into, 

(4) in connection with any non-trade 

option swap trading activity, then such 

trade option must also be reported 

pursuant to the reporting requirements 

of part 45. If only one counterparty to 

a trade option has previously complied 

with the part 45 reporting provisions, as 

described above, then that counterparty 

shall be the part 45 reporting entity for 

the trade option. If both counterparties 

have previously complied with the part 

45 reporting provisions, as described 

above, then the part 45 rules for 

determining the reporting party will 

apply.45

By applying the part 45 reporting 

requirements to trade options in this 

manner, the Commission will obtain 

greater transparency and improved 

oversight of the swaps markets, both of 

which are primary statutory objectives 

of Title VII of the Dodd-Frank Act. The 

Commission believes, however, that 

greater transparency regarding the trade 

options market must be balanced against 

the burdens of frequent and nearinstantaneous reporting required under 

part 45 of the Commission’s regulations 

on counterparties who are not otherwise 

obligated to report because they do not 

have other reportable swap activity. 

Accordingly, if neither counterparty to a 

trade option already is complying with 

the reporting requirements of part 45 as 

a reporting party in connection with its 

non-trade option swap trading activities 

as described above,46 then such trade 

option is not required to be reported 

pursuant to the reporting requirements 

of part 45.47

iii. Annual Notice Filing Alternative to 

Part 45 Reporting; Form TO 

To the extent that neither 

counterparty to a trade option has 

previously submitted reports to an SDR 

as a result of its swap trading activities 

as described above, the Commission 

recognizes that requiring these entities 

to report trade options to an SDR under 

part 45 of the Commission’s regulations 

solely with respect to their trade options 

activity would be costly and time 

consuming. As an alternative, the 

interim final rule requires any 

counterparty to an otherwise unreported 

trade option to submit an annual filing 

to the Commission for the purpose of 

providing notice that it has entered into 

one or more unreported trade options in 

the prior calendar year. Unlike with 

trade options subject to the part 45 

reporting requirement, wherein only 

one counterparty to the trade option 

reports the transaction to an SDR, the 

notice filing requirement applies to both 

counterparties to an unreported trade 

option. Because the purpose of the 

notice filing requirement is to identify 

to the Commission those market 

participants engaging in unreported 

trade options, the notice filing 

requirement applies whether or not 

such counterparty has also been a nonreporting counterparty to a reported 

trade option in the twelve months 

preceding the date on which the 

unreported trade option was entered 

into. Market participants will satisfy the 

annual notice filing requirement by 

completing and submitting a new 

Commission form, Form TO, by March 

1 following the end of any calendar year 

during which the market participant 

entered into one or more unreported 

trade options. 

Form TO requires an unreported trade 

option counterparty to: (1) Provide 

name and contact information, (2) 

identify the categories of commodities 

(agricultural metals, energy, or other) 

underlying one or more unreported 

trade options which it entered into 

during the prior calendar year, and (3) 

for each commodity category, identify 

the approximate aggregate value of the 

underlying physical commodities that it 

either delivered or received in 

connection with the exercise of 

unreported trade options during the 

prior calendar year. For the purposes of 

item (3), a reporting counterparty 

should not include the value of 

commodities that were the subject of 

trade options that remained open at the 

end of the calendar year or any trade 

options that expired unexercised during 

the prior calendar year. 

Pursuant to the interim final rule, 

Form TO is an annual filing 

requirement. The form must be 

submitted to the Commission no later 

than March 1 for the prior calendar year. 

For example, if a market participant 

enters into one or more unreported trade 

options between January 1, 2013 and 

December 31, 2013 (as will be discussed 

in the effective date and compliance 

date discussion, below, the first 

calendar year for which a Form TO will 

be due to the Commission is 2013), the 

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

49 17 CFR part 20. Note that swap large trader 

reporting obligations apply only to SDs and clearing 

members. Trade option sellers and buyers (unless 

they fall within one of the part 20 reporting party 

categories) would not be responsible for filing large 

trader reports. 

50 17 CFR part 151. Note that position limits 

apply only to speculative positions in those 

referenced contracts specified in part 151. Trade 

options, which are commonly used as hedging 

instruments or in connection with some 

commercial function, would normally qualify as 

hedges, exempt from the speculative position limit 

rules. 

51Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer, 77 

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

provisions, like the part 20 provisions, would only 

apply to certain large sophisticated entities—in this 

case, SDs and MSPs. 

52 17 CFR part 180. 

53 17 CFR 23.410. 

market participant must submit a 

completed Form TO to the Commission 

on or before March 1, 2014. Form TO is 

set out in appendix A to part 32 of the 

Commission’s regulations and will be 

available electronically on the 

Commission’s Web site at least ninety 

days before the first compliance date for 

filing of that form, March 1, 2014. The 

Form TO filing requirement will 

provide the Commission a minimally 

intrusive level of visibility into the 

unreported trade options market, will 

guide the Commission’s efforts to collect 

additional information through its 

authority to obtain copies of books or 

records required to be kept pursuant to 

the Act 48 should market circumstances 

dictate, and will enable the Commission 

to determine whether these 

counterparties should be subject to more 

frequent and comprehensive reporting 

obligations in the future. 

iv. Specific Request for Comment on 

Trade Option Reporting and/or Notice 

Filing Requirements 

The Commission is specifically 

requesting comment on including these 

part 45 recordkeeping and reporting 

compliance conditions, and the Form 

TO filing requirement for counterparties 

to unreported trade options, in 

connection with the interim final rule’s 

trade option exemption. For example, 

what are the trade-offs between (1) 

reducing or removing the reporting 

requirement and/or notice filing 

requirement (and attendant costs) for 

smaller end-user and commercial 

entities and (2) the Commission’s goals 

of maintaining market visibility and 

eliminating incentives or opportunities 

to avoid regulation? In their comments, 

market participants should identify 

alternatives, if any, to the part 45 

recordkeeping and reporting 

requirements and/or the Form TO filing 

requirement as applicable to trade 

options participants. Commenters 

should explain how such alternatives 

may be able to provide the Commission 

with the equivalent market information 

and visibility it would receive pursuant 

to the part 45 requirements and/or the 

Form TO filing requirement, as 

applicable under the interim final rule, 

while lowering the compliance burden 

on market participants. 

v. Swaps Large Trader Reporting; 

Position Limits 

The interim final rule’s trade option 

exemption also includes certain 

conditions referencing various other 

swaps rules, which rules shall remain 

applicable to trade options under this 

interim final rule. Specifically, the 

following conditions, as set forth in 

interim final rule § 32.3(c), would apply 

to trade options (and trade option 

participants) to the same extent that 

such conditions would apply to any 

other swap (and swap counterparty): (1) 

Large trader reporting under part 20 

(i.e., reporting entities under part 20— 

SDs and clearing members—must 

consider their counterparty’s trade 

option positions just as they would 

consider any other swap position for the 

purpose of determining whether a 

particular counterparty has a 

consolidated account with a reportable 

position, as set forth therein); 49 and (2) 

position limits under part 151 (to the 

extent a trade option position would 

otherwise be subject to the position 

limit rules).50

vi. SD/MSP Conditions 

In addition, § 32.3(c) provides that 

certain provisions of subpart F and 

subpart J of part 23, relating to 

recordkeeping, reporting, and risk 

management duties of SDs and MSPs 

would apply to trade options.51 SDs and 

MSPs participating in trade options will 

also remain subject to CEA section 4s(e), 

which addresses capital and margin 

requirements for SDs and MSPs. Each of 

these SD and MSP conditions simply 

confirms that an SD and/or MSP may 

not avoid certain requirements or 

obligations by structuring its swap 

transactions as trade options. SDs and 

MSPs may participate in trade options 

when they meet the underlying trade 

option offeror or offeree eligibility 

requirements, as applicable. But they 

will remain subject to the SD/MSP 

conditions identified in the interim final 

rule. As with the part 20 and part 151 

conditions applicable to all trade 

options and trade options participants, 

the SD/MSP conditions only apply in 

the context of trade options to the extent 

they would otherwise apply to the 

transaction as any other kind of swap 

(i.e., as a non-trade option). 

vii. Enforcement Provisions 

Finally, at § 32.3(d), the interim final 

rule also retains for trade options the 

antifraud and anti-manipulation rules 

under part 180,52 § 23.410,53 the specific 

options antifraud provisions of preDodd-Frank § 32.9 (renumbered herein 

as § 32.4), and any other general 

antifraud, anti-manipulation, and 

enforcement provisions of the CEA, 

including but not limited to, CEA 

sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 

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

viii. General Exemptive Authority 

Retained 

The trade option exemption also 

contains general exemptive language 

that would permit the Commission, 

upon written request or upon its own 

motion, to exempt any other person, 

either unconditionally or on a 

temporary or other conditional basis, 

from any provisions of part 32 (other 

than the antifraud, anti-manipulation, 

and enforcement rules), or from the 

provisions of the Act, including any 

Commission rule, regulation, or order 

thereunder, otherwise applicable to any 

other swap, if the Commission finds, in 

its discretion, that it would not be 

contrary to the public interest to grant 

such exemption. This supplemental 

language tracks the general exemptive 

provision in the existing trade option 

exemption, and it will provide the 

Commission with the flexibility to 

receive and consider any concerns from 

market participants regarding the scope 

or implementation of the interim final 

rule trade option exemption. 

D. Effective Date; Compliance Date 

The commodity options final rule and 

interim final rule issued herein shall 

become effective 60 days after the 

publication of this document in the 

Federal Register. 

The compliance date for the final rule 

and the interim final rule shall be 60 

days after the term ‘‘swap’’ is further 

defined pursuant to section 721 of the 

Dodd-Frank Act (i.e., 60 days after the 

further definition of ‘‘swap’’ is adopted 

by the Commission and the SEC and 

published in the Federal Register). 

However, for the purpose of complying 

with (1) final rule § 32.2(a), which 

permits entering into commodity 

options transactions in compliance with 

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54See prior 17 CFR 32.4. 

and subject to the provisions of the Act, 

including any Commission rule, 

regulation, or order thereunder, 

otherwise applicable to any other swap, 

and (2) the conditions and provisions of 

the interim final rule trade option 

exemption under § 32.3, the compliance 

date for this final rule and interim final 

rule shall be the compliance date 

associated with any such swaps rules. 

That is, notwithstanding the effective or 

compliance dates identified herein, 

commodity options market participants 

need not comply with any applicable 

condition referencing a swap rule, 

regulation, or order, until such time as 

the rule, regulation, or order is 

applicable to any other swap. In 

addition, the first relevant compliance 

date for the Form TO notice filing 

requirement will be for the calendar 

year beginning January 1, 2013. That is, 

counterparties to unreported trade 

options are required to submit a Form 

TO in connection with their unreported 

trade options entered into between 

January 1 and December 31, 2013 on or 

before March 1, 2014. There is no Form 

TO filing requirement for unreported 

trade options entered into between the 

effective date of this rule and December 

31, 2012. 

V. Interim Final Rule Matters 

This document implements 

regulations addressing the inclusion of 

commodity options in the Dodd-Frank 

Act definition of ‘‘swap.’’ Section 721 of 

the Dodd-Frank Act defines the term 

‘‘swap’’ to include an option of any kind 

that is for the purchase or sale, or based 

on the value, of one or more 

commodities. The existing trade option 

exemption exempts certain trade 

options from the CEA almost entirely 

and was enacted pursuant to section 

4c(b) of the CEA, which provides the 

CFTC with plenary authority to issue 

regulations related to commodity 

options. Such authority was not 

amended by the Dodd-Frank Act, and 

therefore, Congress continues to vest the 

Commission with plenary authority over 

commodity options. Prior to the DoddFrank Act, CFTC regulations provided 

for a trade option exemption, permitting 

the trading of qualifying transactions 

subject only to antifraud, antimanipulation, and enforcement rules.54

As discussed above, the Dodd-Frank Act 

defined commodity options as swaps. 

Accordingly, the CFTC proposed to 

amend the commodity options rules 

generally, and to specifically withdraw 

the trade option exemption, thereby 

providing that commodity options could 

transact subject to the same laws, rules, 

regulations, and orders otherwise 

applicable to all other swaps, consistent 

with the Dodd-Frank Act. As explained 

in the comment summary above, the 

proposal requested comment regarding 

trade options and multiple commenters 

requested that the CFTC retain some 

form of a trade option exemption, 

particularly for physically delivered 

options. Therefore, in response to 

comments, and pursuant to its plenary 

authority over commodity options, the 

CFTC is implementing a revised trade 

option exemption, with certain 

conditions described above, through 

this interim final rule. 

The CFTC nevertheless invites 

comments on this interim final rule and, 

when assessing whether to amend the 

interim final trade option exemption, 

will consider all timely comments 

submitted during the public comment 

period as described in the following 

section. 

VI. Request for Comment on Interim 

Final Rule 

In connection with the interim final 

rule’s trade option exemption in § 32.3 

adopted herein, the Commission 

requests comment on the following 

questions: 

1. Generally, does the interim final 

rule issued herein provide an 

appropriate regulatory framework for 

trade options? 

2. Regarding the trade option 

exemption, will such provision preserve 

appropriate hedging opportunities for 

current users of the trade options 

market? Is there any reason not to retain 

the trade option exemption as issued 

herein? 

a. What types of entities offer trade 

options pursuant to the existing trade 

option exemption? Is the scope of the 

trade option exemption offeror 

requirement in the interim final rule 

(i.e., offerors must be ECPs or 

commercials) appropriate? 

Alternatively, is this offeror requirement 

either too broad or too narrow? 

b. Is the scope of the trade option 

exemption offeree requirement in the 

interim final rule (i.e., offerees must be 

commercials) appropriate? 

Alternatively, is this offeree requirement 

either too broad or too narrow? Should 

ECPs that are not commercials be 

permitted as offerees? Why or why not? 

c. Is the list of commercials described 

in the interim final rule (i.e., a producer, 

processor, or commercial user of, or a 

merchant handling the commodity that 

is the subject of the commodity option 

transaction, or the products or byproducts thereof) appropriate? 

Alternatively, is this description of 

commercials either too broad or too 

narrow? 

d. Is the range of commodity option 

transactions that would qualify for the 

trade option exemption appropriate? 

i. By requiring that a trade option, 

when exercised, must result in the 

immediate (spot) or deferred (forward) 

shipment or delivery of an exempt or 

agricultural commodity, would the 

interim final rule improperly exclude 

other commodity option transactions, 

including other transactions with 

optionality, that should be eligible for a 

trade option exemption? 

ii. In the alternative, is this physical 

delivery requirement of the trade option 

exemption too broad? 

e. Should the interim final rule retain 

the general exemptive authority at 

§ 32.3(e)? 

f. In connection with § 32.3: 

i. Is the requirement to comply with 

the part 45 recordkeeping rules for all 

trade option participants appropriate? 

ii. Is the requirement that certain 

trade options be reported pursuant to 

the reporting provisions of part 45 

appropriate? 

1. Alternatively, should there be a de 

minimis threshold below which part 45 

reporting would not apply to a trade 

option transaction and its participants 

(unless they are SDs/MSPs)? 

2. If the response to the foregoing 

question is yes, should the de minimis 

threshold be based on the underlying 

transactions (volume, value, or some 

other measure), the participant 

characteristics, both, or some other 

measure? Where practicable, please 

identify a specific level at which a de 

minimis threshold may be set. 

iii. In § 32.3(b)(1)(i), the Commission 

provides that trade options reporting for 

commodity options is required for 

counterparties that have become 

obligated to comply with the reporting 

requirements of part 45. The 

Commission understands that in some 

circumstances a counterparty that 

transacts trade options may not, itself, 

be obligated to report under part 45, but 

may be affiliated, at the enterprise or 

group level, with another entity that 

complies with part 45. There may be 

circumstances, therefore, where the 

obligation to report trade options would 

be more appropriately based on trade 

options activity and part 45 reporting at 

the enterprise or group level. 

1. How often do cases occur in which 

a person that is subject to part 45 

receives, in the ordinary course of 

business, transaction-level trade options 

information from a trade option 

counterparty affiliate that is not subject 

to part 45? 

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55For example, should the requirement in 

§ 32.3(b)(1)(i) to report trade options extend to trade 

options counterparties that have become obligated 

to comply with the reporting requirements of part 

45, or are affiliated with a person that is required 

to comply with the reporting requirements of part 

45, provided that such an affiliate obtains through 

the ordinary course of business transaction-level 

information on the trade options entered into by the 

counterparty? An ‘‘affiliate’’ is a person that is 

either commonly owned or commonly controlled, 

consistent with existing CFTC affiliate rules. Two 

persons would be commonly owned affiliates if one 

party directly or indirectly holds a majority 

ownership interest in the other, or if a third party 

directly or indirectly holds a majority interest in 

both, based on holding a majority of the equity 

securities of an entity, or the right to receive upon 

dissolution the contribution of a majority of the 

capital of a partnership. Two persons are commonly 

controlled affiliates if either (1) one person 

possesses the power, directly or indirectly, to direct 

or cause the direction of the management and 

policies of the other person whether through the 

ownership of voting securities, by contract or 

otherwise or (2) a third person possesses the power, 

directly or indirectly, to direct or cause the 

direction of the management and policies of both 

persons whether through the ownership of voting 

securities, by contract or otherwise. 

56 76 FR 6095, 6102, Feb. 3, 2011 (citing 17 CFR 

32.4(a), which exempts a commodity option when 

it is offered to ‘‘a producer, processor, or 

commercial user of, or a merchant handling, the 

commodity which is the subject of the commodity 

option transaction, or the products or by-products 

thereof, and that such producer, processor, 

commercial user or merchant is offered or enters 

into the commodity option transaction solely for 

purposes related to its business as such’’). 

57See 17 CFR 32.4. See also 17 CFR part 35 as 

in effect prior to December 31, 2011. In addition, 

there was a stand-alone regulatory regime for 

agricultural trade options set forth in pre DoddFrank 17 CFR 32.13. 

58As discussed further below, as a consequence, 

the Commission is without reliable data from which 

to assess the size of the commodity options market 

or the number or types of market participants in it, 

which in turn makes quantification of the costs and 

benefits of this rulemaking largely impracticable. 

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

definition of ‘‘swap’’ any option on a contract of 

sale of a commodity for future delivery (i.e., options 

on futures traded on designated contract markets). 

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

2. Should § 32.3(b)(1) be revised to 

account for such situations and, if so, 

how? 55

iv. Is the requirement that 

counterparties to unreported trade 

options submit an annual notice filing, 

via Form TO, for the purpose of 

notifying the Commission that such 

counterparty entered into one or more 

unreported trade in the prior calendar 

year appropriate? 

1. Alternatively, should these trade 

options be reported pursuant to part 45, 

notwithstanding that these 

counterparties do not otherwise comply 

with those requirements in connection 

with their swap trading activities? What 

would be the costs and benefits of this 

alternative condition? Please provide 

data and estimates to support your 

comments. 

2. Should Form TO be required to be 

submitted more often (e.g., quarterly or 

monthly) and/or to require additional 

data fields (e.g., expired and/or open 

trade options and transaction specific 

data for each unreported trade option)? 

What would be the costs associated with 

requiring more frequent and/or more 

detailed filings? Please provide data and 

estimates to support your comments. 

v. Is the swaps large trader reporting 

condition (part 20) appropriate for the 

trade option exemption? 

vi. Is the position limit condition (part 

151) appropriate for the trade option 

exemption? 

vii. Are the SD and MSP 

recordkeeping, reporting, and risk 

management conditions, as applied via 

part 23, appropriate for SDs and MSPs 

transacting under the trade option 

exemption? 

viii. Is the condition retaining the 

applicability of CEA section 4s(e) 

(Capital and Margin Requirements for 

SDs and MSPs) appropriate? 

ix. Are the antifraud, antimanipulation, and enforcement related 

conditions appropriate for the trade 

option exemption? 

x. Since trade options have to be 

physically delivered and may only be 

offered to commercials for use in their 

business as such, does it makes sense to 

exclude trade options from the 

calculation of whether or not a market 

participant is required to register as an 

SD or MSP? Alternatively, is there any 

reason to include trade options in the 

calculation of whether or not a market 

participant is required to register as an 

SD or MSP? 

3. Does the interim final rule issued 

herein omit or fail to appropriately 

consider any other areas of concern 

regarding commodity options? 

4. The Commission also invites 

comments on the costs and benefits 

considerations of the interim final rule 

under CEA section 15a, below. The 

Commission specifically requests that 

commenters quantify the costs and 

benefits, where practical. 

Comments on these questions and the 

interim final rule must be submitted to 

the Commission, pursuant to the 

instructions provided above, on or 

before June 26, 2012. 

VII. Related Matters 

A. Cost Benefit Considerations 

1. Background 

Prior to the passage of the Dodd-Frank 

Act, the Commission’s regulations 

permitted certain commodity option 

transactions, including ‘‘trade options.’’ 

As described above and in the NPRM, 

trade options are used by commercial 

entities entering into the commodity 

option transactions solely for purposes 

related to their business involving the 

commodity.56 Buyers and sellers of 

trade options transact bilaterally offexchange.57

Under the pre-Dodd-Frank regulatory 

construct, neither the buyer nor the 

seller of a commodity trade option were 

required to register with the 

Commission, maintain books and 

records, or report their transactions to 

the Commission in connection with 

their trade options activity. As a result, 

the current trade option market is 

opaque, affording virtually no regulatory 

visibility into its composition and 

scope.58

Congress altered the foundation for 

this regulatory construct in passing the 

Dodd-Frank Act, by, among other 

things, determining that the definition 

of ‘‘swap’’ would include, among other 

products, commodity options. Section 

721 of the Dodd-Frank Act added 

section 1a(47) to the CEA, defining 

‘‘swap’’ to include not only ‘‘any 

agreement, contract, or transaction 

commonly known as,’’ among other 

things, ‘‘a commodity swap,’’ but also 

‘‘[an] option of any kind that is for the 

purchase or sale, or based on the value, 

of 1 or more * * * commodities 

* * *.’’ 59 In addition, the Dodd-Frank 

Act mandated substantial changes in the 

swaps regulatory regime to reduce risk, 

increase transparency, and promote 

market integrity within the financial 

system. 

This legislative act implicitly required 

the Commission to revisit its historical 

treatment of commodity options, 

including trade options. In so doing, the 

Commission is mindful that one of the 

purposes of the Dodd-Frank Act is to 

increase transparency of the financial 

markets, including the commodity 

options markets. 

In response to the Dodd-Frank Act’s 

definition of ‘‘swap’’ to include options, 

on February 3, 2011, the Commission 

published in the Federal Register a 

Notice of Proposed Rulemaking 

(‘‘NPRM’’) that proposed to treat all 

commodity options (other than options 

on futures) as swaps. In the NPRM, the 

Commission proposed to require that all 

such commodity option transactions, 

including trade options, comply with 

the requirements that apply to swaps 

generally. While the NPRM received 

significant public comment, no 

commenter provided any quantitative 

data on costs or benefits. 

Comments to the NPRM from the 

Energy Working Group typified 

commenters’ concern that treating 

options on physical commodities like 

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60Energy Working Group at 2. 

61Energy Working group at 11. 

62APGA at 4. 

63EEI–EPSA at 3. 

64EEI–EPSA at 7–8. 

65Commodity Options and Agricultural Swaps 

Working Group at 3–4. 66See CEA section 4c(b). 

any other swaps would impose 

significant costs: 

Treating Physical Options transacted in 

such markets as ‘‘swaps’’ would create 

uncertainty and impose costly and 

duplicative regulatory requirements.60

[T]he Working Group sees no reason the 

Commission should not continue to treat 

Physical Options entered into by a 

commercial entity as commercial 

transactions exempt from the majority of the 

provisions of the CEA.61

And in specific response to the 

NPRM’s removal of the trade option 

exemption provided for in pre-DoddFrank § 32.4 of the Commission’s 

regulations, commenters urged the 

Commission to reconsider, as 

exemplified by the following comments 

from APGA and EEI–EPSA, 

respectively: 

Although the Commission concludes that 

removal of the trade option exemption will 

have limited impact on market participants 

because of the swap end-user exemption, the 

regulatory requirements which would apply 

if these cash contracts are treated as though 

they are options would be enormous. First, 

characterizing these contracts as options 

would require compliance with all of the 

swap rules, including possibly requiring a 

natural gas producer whose only business is 

selling the physical product to register as a 

swap dealer.62

Regulations that make effective risk 

management tools and physical supply more 

costly for end-users of swaps and commodity 

options will result in higher and more 

volatile energy prices for retail, commercial, 

and industrial customers.63

The Commission also received 

specific comments requesting a trade 

option exemption for options that, if 

exercised, result in physical delivery.64

Commenters also explained the need to 

retain a trade option exemption in the 

context of agricultural trade options.65

In this final rulemaking, the 

Commission is repealing and replacing 

the Commission’s regulations 

concerning commodity options. Upon 

consideration of the comments to the 

NPRM, the Commission also is adopting 

an interim final rule that incorporates 

an exemption for ‘‘trade options.’’ 

In the discussion that follows, the 

Commission considers the costs and 

benefits of, and alternatives to, 

amending the regulations applicable to 

commodity options, including the trade 

option exemption that makes up the 

interim final rule, § 32.3; this interim 

final rule, the § 32.3 trade option 

exemption, will operate as an 

alternative to the general commodity 

options authorization in § 32.2. The 

Commission considers these costs and 

benefits of its actions in the discussion 

that follows. 

2. Statutory Mandate To Consider the 

Costs and Benefits of the Commission’s 

Action: CEA Section 15(a) 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits shall be evaluated in light of the 

following five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its own 

discretionary determinations with 

respect to the section 15(a) factors. 

The costs and benefits associated with 

the inclusion of commodity options in 

the definition of swap in the DoddFrank Act are attributable to Congress, 

and therefore beyond the scope of the 

consideration of costs and benefits 

required by CEA section 15(a). The 

Commission considers the costs and 

benefits attributable to its actions in this 

rulemaking against the basic framework 

provided by the statute—in which 

options are swaps subject to all of the 

requirements attendant to that 

definition under the Dodd-Frank Act 

and the CEA (as amended by DoddFrank Act). 

In proposing the rules, the 

Commission requested comment on all 

aspects of its cost benefit analysis, 

including the identification and 

assessment of any costs and benefits not 

discussed in our analysis, and data 

relevant to these costs and benefits. 

Several commenters provided 

comments on the costs and benefits of 

the proposal in qualitative terms, but 

none provided data from which to 

quantify costs and benefits. 

The opacity with which trade options 

historically have been transacted affords 

the Commission no meaningful 

visibility with respect to the 

composition and scope of trade option 

activities necessary to quantify costs 

and benefits of this rulemaking. The 

lack of quantification in comments 

reinforces this conclusion and further 

demonstrates that there is no reasoned 

basis for determining how many 

commercials engage in commodity 

options or, more specifically, trade 

options. In other words, there is no 

reliable information from which to 

assess the number of commercials that 

transact in commodity options today, or 

will do so in the future. There is also no 

way determine the number or type of 

entities that would choose to avail 

themselves of the trade option 

exemption that is the subject of this 

interim final rule. Notwithstanding 

these limitations, based on the 

comments received, it is apparent that 

commercials place great importance on 

the continued availability of a trade 

option exemption. 

3. Benefits and Costs of the Final Rule 

a. Benefits 

The purpose and primary benefit of 

the final rule is to align the 

Commission’s general commodity 

options provisions in part 32 with the 

Dodd-Frank swaps regime by providing, 

in general, that commodity options that 

are swaps (i.e., commodity options other 

than options on futures) will be treated 

the same as all other swaps, with one 

exception: commodity options satisfying 

the terms of a revised trade option 

exemption. The final rule is permissive 

and administrative in nature, 

necessitated by the Commission’s 

plenary rulemaking authority over 

commodity options, which provides 

that: ‘‘No person shall offer to enter into, 

enter into or confirm the execution of, 

any transaction involving any 

commodity regulated under this chapter 

which is [a commodity option 

transaction], contrary to any rule, 

regulation, or order of the Commission 

prohibiting any such transaction or 

allowing any such transaction under 

such terms and conditions as the 

Commission shall prescribe.’’ 66 As 

discussed above, the final rule also 

permits DCM-traded options on 

underlying commodities, albeit under 

the provisions of new part 32 rather 

than existing part 33. New part 32 

permits commodity options to trade 

subject to the same rules applicable to 

any other swap, and the Dodd-Frank Act 

permits swaps to be transacted on a 

DCM. These changes will further the 

public benefits Congress intended by 

applying the swaps statutory and 

regulatory regimes to commodity 

options generally. 

b. Costs 

The Commission does not believe 

there are significant, if any, costs 

associated with the final rule relative to 

the requirements imposed by statute. 

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25332 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

67E.g., Large Trader Reporting for Physical 

Commodity Swaps, 76 FR 43851, Sept. 20, 2011; 

Position Limits for Futures and Swaps, 76 FR 

71626, Nov. 18, 2011; and Swap Dealer and Major 

Swap Participant Recordkeeping, Reporting, and 

Duties Rules; Futures Commission Merchant and 

Introducing Broker Conflicts of Interest Rules; and 

Chief Compliance Officer Rules for Swap Dealers, 

Major Swap Participants, and Futures Commission 

Merchants, 77 FR 20128, Apr. 3, 2012. 

68Nevertheless, the Interim Final Rule does 

permit individuals to request exemptive orders on 

a case-by-case basis. 

69See, e.g., Prohibition on the Employment, or 

Attempted Employment, of Manipulative and 

Deceptive Devices and Prohibition on Price 

Manipulation, 76 FR 41398, July 14, 2011. 

70See Swap Data Recordkeeping and Reporting 

Requirements, 77 FR 2136, Jan. 13, 2012 

(‘‘Recordkeeping and Reporting Rules’’). 

This is so because the final rule does 

not, by itself, impose any substantive or 

administrative requirements on 

commodity option market participants. 

Rather, by adopting this final rule, the 

Commission provides the required 

general authorization for commodity 

options that are subject to the swap 

definition, and removes any uncertainty 

as to whether CEA section 4c(b) would 

otherwise prohibit such commodity 

options. This is not to say that there are 

no significant costs associated with 

transacting commodity options. 

Although not specific to this final rule, 

there are costs attendant to the various 

regulations applicable to transacting in 

commodity options, including the costs 

of recordkeeping and reporting 

requirements. Those costs, however, are 

discussed in the various swaps rules 

that impose the substantive 

requirements.67

4. Interim Final Rule Benefits and Costs 

a. Benefits 

Under the CEA, as amended by the 

Dodd-Frank Act, the Commission is 

under no statutory obligation to issue an 

exemption for trade options. In fact, a 

plain reading of section 721 of the 

Dodd-Frank Act makes clear that all 

commodity options are swaps, without 

any special treatment of trade options. 

However, in light of the comments 

received, the Commission believes that 

retaining a trade option exemption is in 

the public interest. 

The purpose and primary benefit of 

the interim final rule is that it preserves 

a means for hedging by commercial 

market participants through physically 

delivered options, albeit with important 

conditions and modifications from the 

existing trade option exemption. More 

specifically, the interim final rule 

provides a benefit (relative to the 

statutory requirements) in the form of a 

cost-saving exemption from certain 

swaps regulations for trade options on 

exempt and agricultural commodities as 

between certain commercial and 

financially-sophisticated counterparties. 

Additionally, the interim final rule 

benefits market participants that meet 

the conditions of the trade option 

exemption by eliminating the costs and 

inefficiencies that could result if the 

Commission were to pursue the 

alternative of requiring entity- or 

product-specific requests for exemptive 

orders.68

b. Costs 

Although we consider certain costs 

that may result from the interim final 

rule, and make comparisons to various 

alternatives, the Commission does not 

believe that the interim final rule will 

impose mandatory costs on any entity 

because the rule is exemptive, rather 

than prescriptive, and entities are not 

required to rely on it. Therefore, the 

Commission assumes that an entity will 

rely on the exemption only if the 

anticipated benefits warrant the costs 

attendant to the conditions the 

Commission is attaching to the 

exemption. Notwithstanding this 

assumption, the conditions on the trade 

option exemption may impose some 

costs on entities that choose to rely 

on it. 

The interim final rule conditions the 

ability to transact trade options under 

the exemption on the following: offerors 

must be ECPs or commercials; offerees 

must be commercials; and the trade 

option, if exercised, must result in 

physical delivery. 

Under the interim final rule, those 

relying on the trade option exemption 

must comply with certain regulatory 

requirements, including: Recordkeeping 

and reporting; position limits; and large 

trader reporting. While the conditions 

applicable to entities availing 

themselves of the trade option 

exemption—for example, compliance 

with position limits and large trader 

reporting, and subjection to the various 

enforcement provisions 69—are part of 

this Commission action, most of the 

costs and benefits of those requirements 

are discussed in other rulemakings, or 

are otherwise not expected to be 

significant. The costs and benefits of the 

recordkeeping and reporting obligations 

are discussed elsewhere.70 Moreover, 

reporting pursuant to the swaps large 

trader rules in part 20 will only be 

required for SDs and clearing members, 

and, based on the comments received on 

the NPRM, few trade option buyers are 

likely to fall within either of these 

categories. The speculative position 

limit rules of part 151 will only apply 

to trade options that involve ‘‘referenced 

contracts’’ pursuant to the terms of part 

151, and the Commission expects that 

most trade options entered into by 

commercial parties would be exempt 

from position limits in any event based 

on a position limit exemption for bona 

fide hedging transactions. The SD and 

MSP-specific conditions in the trade 

option exemption, which incorporate 

certain provisions from part 23, 

similarly do not impose any additional 

cost burden on SDs/MSPs beyond the 

retention of existing rules applicable to 

SDs/MSPs. 

The costs attributable to the 

Commission’s exercise of discretion in 

this rulemaking—and that have not been 

considered in other rulemakings—are 

those generated by the reporting and 

recordkeeping requirements imposed 

upon commercials transacting in trade 

options but not otherwise reporting 

their transactions. This action should 

reduce costs relative to the basic 

statutory requirements (with no further 

action by the Commission) which would 

have subjected all trade options to the 

full array of regulatory requirements for 

swaps, including but not limited to part 

45. However, the Commission requests 

information and estimates about the 

costs and benefits to market participants 

and the public that would result from 

requiring market participants to report 

on their trade options at two levels: 

(1) the enterprise or group level (as 

described in section VI, question 

2(f)(iii), above), and (2) the person level 

as is provided for in the interim final 

rule at § 32.3(b)(1)(i). 

c. Costs and Benefits as Compared to 

Alternatives 

The range of alternative conditions 

available to the Commission with 

respect to who may transact trade 

options is wide—that is, the 

Commission could have decided that 

anyone or no one could be an offeror or 

offeree. Either of these extremes, 

however, would render almost 

meaningless either the exemption (if no 

one could be an offeror or an offeree) or 

the option element of the swap 

definition (if anyone could be an offeror 

or an offeree). Therefore, in striving to 

achieve the optimal balance of allowing 

those with a commercial need to hedge 

the price risk of a physical commodity 

while ensuring that there are enough 

market participants to provide the 

necessary liquidity to hedge that risk, 

the Commission determined to allow 

ECPs and non-ECP commercials to be 

offerors. On the offeror side, excluding 

commercial non-ECPs would have 

limited hedging opportunities available 

to non-ECPs who are active users of 

trade options as both buyers and sellers, 

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71See Recordkeeping an Reporting Rules, 77 FR 

at 2141, Jan. 13, 2012 (explaining that ‘‘[c]omplete 

records regarding each swap should be required 

from all counterparties, including non-SD/MSP 

counterparties to physical commodity swaps and 

other swaps, because such records are essential for 

effective market oversight and prosecution of 

violations by the Commission and other regulators’’ 

and that ‘‘[e]xperience with recordkeeping 

requirements in the context of futures suggests that 

all market participants are able to retain such 

records’’). 

72The annual report would require counterparties 

to unreported trade options to provide: name and 

contact information; commodity categories 

(agricultural, metals, energy, or other); and 

approximate value (under $10 million, $10–100 

million, over $100 million) of commodities 

purchased or delivered in connection with options 

exercised during the prior calendar year. 

73NGFA at 2. 

depending on their commercial need. 

On the offeree side, the Commission 

considered it important to preserve the 

integrity of the trade options market for 

use by commercial users. If the rule had 

allowed entities other than commercial 

users to be buyers, the trade option 

market would be indistinguishable, 

arguably, from the general swaps 

market; there would be no connection 

between a buyer’s purchase of a trade 

option, the trade option buyer’s 

underlying commercial functions, and 

the buyer’s commercial need to make 

and take delivery. 

Similarly, the Commission could have 

elected to make the exemption available 

for trade options that, if exercised, result 

in either physical or financial settlement 

of the option. The Commission limited 

the condition to physical settlement out 

of a concern that if it allowed financial 

settlement, parties could evade the 

requirements otherwise applicable to 

swaps by merely labeling their 

transaction a trade option even though 

it was unrelated to their business as a 

commercial. The Commission notes, as 

did commenters, that the trade option 

exemption is rooted in a need by 

commercials to hedge the price risk of 

physical commodities, including but not 

limited to agricultural and energy 

commodities. Permitting financiallysettled trade options would make this 

market, which is used for making or 

taking delivery of physical commodities 

needed for a commercial function, 

indistinguishable from the financial 

world of swaps and futures. In addition, 

and as noted above, commenters 

focused on the need for a trade option 

exemption specifically for physically 

delivered options. The Commission did 

not receive similar comments regarding 

financially settled transactions. 

The Commission also had a range of 

alternatives with respect to regulatory 

requirements applicable to trade option 

transactions. For commercials, the 

Commission considered alternatives, 

ranging from requiring full compliance 

with part 45 to no requirements in light 

of its special call authority to request 

and obtain information. Given that one 

of the purposes of the Dodd-Frank Act 

is to increase market transparency and 

regulatory visibility into OTC markets, 

however, the Commission does not 

believe an exemption with no attendant 

recordkeeping or reporting requirements 

for commercials is a reasonable 

alternative.71 At the same time, the 

Commission believes that requiring full 

compliance with part 45’s 

recordkeeping and reporting 

requirements by commercials would be 

unnecessary to achieve the desired and 

expected benefits of the interim final 

rule. Therefore, to mitigate the costs of 

compliance for otherwise non-reporting 

counterparties, the Commission is only 

requiring such counterparties to keep 

basic business records regarding their 

trade options transactions and to file an 

annual report with the Commission.72

The Commission believes that the 

recordkeeping requirement in the 

interim final rule may result in 

additional costs for commercials that 

currently do not maintain the nowrequired records. However, the 

Commission believes that most, if not 

all, commercials already retain the basic 

business records required by the new 

rule as a matter of good business 

practice. With respect to reporting, the 

Commission believes the form 

prescribed by the Commission for 

annual reports will entail some 

administrative and legal costs for such 

commercials. 

Additionally, because the 

Commission believes that a distinction 

between agricultural commodities and 

other physical commodities is 

unwarranted, it is permitting 

agricultural trade options to rely on the 

revised general trade option exemption. 

The Commission declined to adopt the 

alternative that would have maintained 

this historically distinct treatment of 

trade options on agricultural 

commodities because, as commenter 

NGFA stated, the distinction was 

unwieldy and, consequently, the 

agricultural trade option (ATO) regime 

was largely unused.73 The Commission 

also did not elect to carry over the $10 

million net worth restriction under the 

existing ATO exemption in § 32.13(g). 

The Commission anticipates that the 

new trade option exemption will create 

new hedging opportunities for a wide 

range of agricultural commercial market 

participants that have heretofore been 

precluded from entering into trade 

options for agricultural commodities by 

that net worth restriction. 

5. Section 15(a) Factors (of the Final 

Rule and Interim Final Rule, as a 

Whole) 

As noted above, in this final rule and 

interim final rule, the Commission 

considers the costs and benefits that 

result from the regulations issued 

herein. 

a. Protection of Market Participants and 

the Public 

The interim final rule trade option 

exemption will further the protection of 

market participants and the public by 

ensuring that trade options continue to 

be authorized, subject to recordkeeping 

and reporting requirements, large trader 

reporting and position limit 

requirements, certain SD/MSP rules, 

and explicit antifraud, antimanipulation, and enforcement 

protections. These requirements will 

provide the Commission and the public 

with increased visibility into this 

marketplace and will protect market 

participants from fraudulent conduct by 

others. In the same way, the final rule 

permits commodity options, generally, 

subject to the rules and protections 

applicable to every other swap pursuant 

to the Dodd-Frank Act (and its related 

rulemakings). 

b. Efficiency, Competitiveness, and 

Financial Integrity of the Markets 

The trade option exemption provides 

an important hedging and risk 

management tool for commercial market 

participants, while also providing the 

Commission with vital visibility tools 

(i.e., the recordkeeping and reporting 

requirements as well as the large trader 

reporting requirement) to help ensure 

the integrity of these markets. By 

permitting these valuable hedging and 

risk management tools, the Commission 

is facilitating the ability of market 

participants to hedge their risks more 

efficiently, since participants will have 

a larger set of hedging mechanisms 

available to them. In addition, providing 

a revised trade option exemption 

enhances competitiveness by continuing 

to provide market participants with a 

range of risk management choices. 

Finally, requiring option offerors to be 

ECPs or commercials enhances financial 

integrity by helping to assure that 

option grantors will have some minimal 

level of financial resources and 

sophistication, or will be commercial in 

nature, in order to reduce the risk that 

a seller would not be able to perform its 

obligations under a commodity option. 

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74See 5 U.S.C. 601 et seq. 

75See, respectively and as indicated, 47 FR 

18618, 18619, Apr. 30, 1982 (DCMs, CPOs, FCMs, 

and large traders); 66 FR 45604, 45609, Aug. 29, 

2001 (DCOs); 66 FR 20740, 20743, Apr. 25, 2001 

(ECPs); and 57 FR 53627, 53630, Nov. 12, 1992 and 

58 FR 5587, 5593, Jan. 22, 1993 (ESPs). 76Small Business Administration, Table of Small 

Business Size Standards, (Nov. 5, 2010). 

77See respectively, Registration of Swap Dealers 

and Major Swap Participants, 77 FR 2613, 2620, 

c. Price Discovery 

The trade options marketplace will 

continue to augment the exchangetraded financial markets in serving their 

price discovery function for a subject 

commodity. The Commission notes that 

there will be less price discovery for 

those trade options that are not 

otherwise required to meet the part 45 

reporting requirements. Nevertheless, 

the Commission believes that the 

conditions discussed above should 

allow the trade options market to 

continue functioning in a manner that 

provides enough visibility to regulators. 

In addition, the Commission would 

have the authority to request and obtain 

additional information from trade 

option counterparties under its special 

call authority. 

d. Sound Risk Management Procedures 

The comments received on the NPRM 

(discussed above) highlighted trade 

options as a fundamental risk 

management tool for commercial users 

of many physical commodities. By 

issuing the interim final rule trade 

option exemption, the Commission is 

facilitating the use of trade options by 

these commercial market participants in 

conjunction with the general DoddFrank swaps regime. Specifically, when 

exchange-traded products do not 

provide the appropriate coverage or 

scope in connection with a hedging 

need for a commercial market operation, 

the trade option exemption will allow 

for agreements to be tailored by the 

parties on a transaction-by-transaction 

basis in order to meet the physical 

delivery needs of a commodity for a 

given commercial purpose. As noted 

above, the final rule provides an equally 

important component of the derivatives 

market (and a tool for risk management) 

by retaining a general authority for 

commodity options that are not trade 

options. 

e. Other Public Interest Considerations 

The Commission believes that 

providing the revised trade option 

exemption, in conjunction with the 

general authorization for all commodity 

options, is consistent with the public 

interest (particularly as demonstrated by 

the commenters) in providing effective 

and efficient risk management tools to 

commercial market participants, as well 

as in providing a strong legal framework 

for the trade options and general options 

market. The Commission acknowledges 

that the revised trade option exemption 

will remove those swaps that fall within 

it from certain aspects of the DoddFrank regime to which they otherwise 

would be subject. Nevertheless, based 

on its historical experience regulating 

commodity options, and the proven past 

utility of a trade option exemption for 

physical delivery options used by 

commercial parties, the Commission 

believes that exercise of its CEA section 

4c(b) plenary authority to exempt trade 

options in the interim final rule is 

appropriate and benefits the public 

interest. In addition, the recordkeeping 

and reporting requirements, as well as 

the other conditions discussed above, 

should allow the trade options market to 

continue functioning in a manner that 

provides sufficient visibility to 

regulators. 

6. Request for Comment on CBC in 

Connection With Interim Final Rule 

After considering the section 15(a) 

factors, the Commission has determined 

to issue part 32 and the amendments to 

part 33 as described herein. The 

Commission invites public comment on 

its cost-benefit considerations in 

connection with the interim final rule 

trade option exemption. Commenters 

are encouraged to submit any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits of the interim final rule trade 

option exemption with their comment 

letters. In addition, the Commission 

seeks comment on whether the offeror 

requirement imposes any additional 

costs, particularly when compared with 

the general Dodd-Frank swaps regime, 

which does not otherwise provide for 

the trade option classification, and 

whether limiting the trade option 

exemption to physically delivered 

contracts (and requiring all other 

commodity options to transact under 

the general swaps rules) imposes any 

significant or unreasonable cost on 

market participants. 

B. Regulatory Flexibility Analysis 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the rules they issue will have 

a significant economic impact on a 

substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.74 The final rule, in amending 

part 33, would affect entities that 

currently engage in options on physical 

commodities on a DCM, and the final 

rule and interim final rule, in replacing 

part 32, would affect those entities that 

currently engage in options under § 32.4 

and § 32.13(g). By generally mandating 

that commodity options be treated as all 

other swaps, with one exemption for 

trade options, the effect of the rules has 

the potential to affect designated 

contract markets (‘‘DCMs’’), derivatives 

clearing organizations (‘‘DCOs’’), futures 

commission merchants (‘‘FCMs’’), large 

traders and eligible contract participants 

(‘‘ECPs’’), as well as SDs, MSPs, 

commodity pool operators (‘‘CPOs’’), 

swap execution facilities (‘‘SEFs’’), swap 

data repositories (‘‘SDRs’’), and certain 

non-ECP commercial market 

participants that enter into trade 

options. 

1. DCMs, DCOs, FCMs, CPOs, large 

traders, ECPs, and ESP 

The Commission has previously 

determined that DCMs, DCOs, FCMs, 

CPOs, large traders, ECPs, and eligible 

swap participants (‘‘ESPs’’) are not 

small entities for purposes of the 

Regulatory Flexibility Act.75

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the final 

and interim final rules adopted herein 

will not have a significant economic 

impact on a substantial number of small 

entities with respect to these entities. 

The Commission received one 

comment from the Power Coalition 

asserting that certain of its member 

entities may both be ECPs under the 

CEA and small businesses under the 

RFA. These members, as the 

Commission understands, have been 

determined to be small entities by the 

Small Business Administration (‘‘SBA’’) 

because they are ‘‘primarily engaged in 

the generation, transmission, and/or 

distribution of electric energy for sale 

and [their] total electric output for the 

preceding fiscal year did not exceed 4 

million megawatt hours.’’ 76 For all 

entities that may both be ECPs and have 

been determined by the SBA to be small 

businesses under the RFA, the initial 

regulatory flexibility analysis in the 

proposed rulemaking and the final 

regulatory flexibility analysis, in 

subsection ‘‘5’’ below, discusses the 

impact of the rulemaking on small 

entities. 

2. SDs, MSPs, SEFs, and SDRs 

SDs, MSPs, SEFs, and SDRs are new 

categories of registrant under the DoddFrank Act. Pursuant to various DoddFrank rulemakings, the Commission has 

determined that SDs, MSPs, SEFs, and 

SDRs are not ‘‘small entities’’ for 

purposes of the RFA.77 Accordingly, the 

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Jan. 19, 2012 (swap dealers and major swap 

participants); Requirements for Derivatives Clearing 

Organizations, Designated Contract Markets, and 

Swap Execution Facilities Regarding the Mitigation 

of Conflicts of Interest, 75 FR 63732, 63745, Oct. 18, 

2010 (SEFs); and Swap Data Repositories, 75 FR 

80898, 80926, Dec. 23, 2010 (SDRs). 

78See 76 FR 6095, at 6107, Feb. 3, 2011. 79See 76 FR 6095, at 6017–6018, Feb. 3, 2011. 

80 5 U.S.C. 601(6) (threshold for certain 

agricultural entities under the RFA). 

Chairman, on behalf of the Commission, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the final and interim final 

rules adopted herein, with respect to 

SDs, MSPs, SEFs, and SDRs, will not 

have a significant impact on a 

substantial number of small entities. 

3. Entities Eligible To Engage in Options 

on Physical Commodities on DCMs 

Under Part 33 

Under the current part 33, there is no 

regulatory financial threshold that must 

be met in order to engage in options on 

underlying commodities on a DCM, so 

small entities would be eligible to 

engage in such transactions. In fact, 

there is no regulatory financial 

threshold that must be met in order to 

engage in any type of transaction on a 

DCM. As noted above, new CEA section 

1a(47) provides that options, other than 

options on futures, are swaps. New CEA 

section 2(e) provides that non-ECPs may 

enter into swaps, if the swaps are 

entered into on a DCM. Therefore, even 

though an option on an underlying 

commodity is defined to be a swap 

under the Dodd-Frank Act, small 

entities will continue to be eligible to 

enter into such options on a DCM under 

the rules issued herein, just as they are 

eligible to enter into such options on a 

DCM under the current part 33. Thus, 

the final and interim final rules will 

have no effect on the eligibility of small 

entities to enter into an option on an 

underlying commodity on a DCM. 

Accordingly, the Chairman, on behalf of 

the Commission, hereby certifies 

pursuant to 5 U.S.C. 605(b) that the final 

and interim final rules will not have a 

significant economic impact on a 

substantial number of small entities 

with respect to entities eligible to 

engage in options on underlying 

commodities on DCMs under part 33. 

4. Entities Engaged in Options Under 

§ 32.13(g) 

The Commission addressed the 

question of whether entities engaged in 

agricultural trade options under 

§ 32.13(g) are, in fact, ‘‘small entities’’ 

for purposes of the RFA in the NPRM. 

In the NPRM, the Commission 

determined that entities engaged in 

options under § 32.13(g) were not small 

entities.78 As noted above, the 

Commission previously has determined 

that ECPs are not small entities for the 

purpose of the RFA based upon, among 

other things, the financial and 

institutional requirements contained in 

the definition. Also as noted above, the 

exemption at § 32.13(g) allows for 

options on the enumerated agricultural 

commodities to be sold when: (1) The 

option is offered to a commercial (‘‘a 

producer, processor, or commercial user 

of, or a merchant handling’’ the 

underlying commodity); (2) the 

commercial enters the transaction solely 

for purposes related to its business as 

such; and (3) each party to the option 

contract has a net worth of not less than 

$10 million. There are two analogous 

provisions in the ECP definition, new 

CEA sections 1a(18)(A)(v)(III) and 

1a(18)(A)(xi)(II). New CEA section 

1a(18)(A)(v)(III) provides that an ECP 

includes a corporation, partnership, 

proprietorship, organization, trust, or 

other entity that has a net worth 

exceeding $1,000,000 and enters into a 

swap in connection with the entity’s 

business or to manage the risk 

associated with an asset or liability 

owned or incurred or reasonably likely 

to be owned or incurred by the entity in 

the conduct of the entity’s business. 

New CEA section 1a(18)(A)(xi)(II) 

provides that an ECP includes an 

individual who has assets invested on a 

discretionary basis, the aggregate of 

which is in excess of $5,000,000 and 

who enters the swap in order to manage 

the risk associated the an asset owned 

or liability incurred, or reasonably likely 

to be owned or incurred, by the 

individual. The participation 

requirements of § 32.13(g)(1) are similar 

to, if not more restrictive than, the 

analogous ECP provisions. 

For purposes of the RFA in this 

rulemaking, the Commission is hereby 

determining that entities engaged in 

options under § 32.13(g) are not 

considered to be ‘‘small entities’’ for 

essentially the same reasons that ECPs 

have previously been determined not to 

be small entities. Accordingly, the 

Chairman, on behalf of the Commission, 

hereby certifies pursuant to 5 U.S.C. 

605(b) that the final and interim final 

rules, with respect to entities engaged in 

options under § 32.13(g), will not have 

a significant impact on a substantial 

number of small entities. 

5. Entities Engaged in Options Under 

Existing § 32.4 

In the NPRM, the Commission 

initially addressed the question of 

whether entities engaged in trade 

options under the existing trade options 

rule are, in fact, ‘‘small entities’’ for 

purposes of the RFA.79 As noted above, 

under the existing trade options rule, an 

option must be offered to a producer, 

processor, or commercial user of, or a 

merchant handling, the commodity, 

who enters into the commodity option 

transaction solely for purposes related 

to its business as such. The existing 

trade option exemption does not 

include any net worth requirement. 

Because there is no net worth 

requirement in the existing trade option 

rule, thus allowing commercial entities 

of any economic status to enter into 

trade option transactions, the 

Commission is not in a position to 

determine whether entities engaged in 

options under the existing trade option 

rule include a substantial number of 

small entities on which the rule would 

have a significant economic impact. 

Therefore, the Commission provided an 

initial regulatory flexibility analysis in 

the NPRM addressing the proposed 

withdrawal of the existing trade option 

exemption on small entities. In the 

NPRM, the Commission identified the 

small entities that would be affected by 

the proposed withdrawal as any 

commercial small entity that would be 

smaller than an ECP and additionally 

would have annual receipts of less than 

$750,000.80

As referenced above, the Commission 

received a comment from the Power 

Coalition that may indicate that certain 

of their members, in particular entities 

that are ‘‘primarily engaged in the 

generation, transmission, and/or 

distribution of electric energy for sale 

and [their] total electric output for the 

preceding fiscal year did not exceed 4 

million megawatt hours,’’ have been 

determined by the SBA to be small 

entities. Such entities may enter into 

option transactions, though the 

Commission does not have sufficient 

information to determine that any such 

entities would constitute a substantial 

number of small entities for purposes of 

the RFA. 

Moreover, for those entities that may 

enter into option transactions that 

would be ECPs with annual receipts 

greater than $750,000, but that also may 

be small entities as determined by SBA, 

it was not indicated in comments to the 

initial regulatory flexibility analysis that 

the effect of the proposed rulemaking 

would be any greater for these entities 

than for the smaller entities the 

Commission identified in the initial 

analysis. Indeed, on a relative basis, the 

larger the entity, the less of an effect the 

rulemaking should have. Critically, 

unlike a non-ECP, which will be unable 

to engage in option transactions except 

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25336 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

81 5 U.S.C. 601(6). See also note 76, above, which 

relates to the Power Coalition’s concern that certain 

entities that meet or exceed the CEA’s ECP 

thresholds may still be small entities for purposes 

of the RFA. This initial regulatory flexibility 

analysis applies equally to such entities. 82See 5 U.S.C. 605(c). 

on a DCM, and (if a commercial) 

through trade options, an entity that is 

both an ECP, as that term is defined in 

the CEA, and a small entity, as 

determined by the SBA, will not be so 

restricted. 

Therefore, the Commission offers, 

pursuant to 5 U.S.C. 604, the following 

final regulatory flexibility analysis: 

• A description of the reasons why 

action by the agency is being 

considered. 

The Commission is taking this 

regulatory action to withdraw the 

existing trade option exemption because 

the Dodd-Frank Act has defined the 

term ‘‘swap’’ to include options. This 

new definition renders the existing 

trade option exemption obsolete in its 

current form. Responding to comments 

received on its NPRM, a revised trade 

option exemption is being issued as 

interim final rule § 32.3. 

• A succinct statement of the 

objectives of, and legal basis for, the 

rule. 

The objective for issuing interim final 

rule § 32.3, is to make the Commission’s 

regulations comport with the CEA as 

revised by the Dodd-Frank Act. As 

stated previously, the legal basis for the 

rule is the CEA definition of swap, 

section 1a(47)(A)(i), and the 

Commission’s plenary options 

authority, CEA section 4c(b). 

• A description of and, where 

feasible, an estimate of the number of 

small entities to which the rule will 

apply. 

The small entities to which the 

withdrawal of the trade option 

exemption and issuance of the final rule 

may apply are those commercial small 

entities that would be smaller than an 

ECP and additionally would have 

annual receipts of less than $750,000, or 

those commercial entities that would be 

an ECP with annual receipts of greater 

than $750,000 but that have been 

determined by SBA to be a small entity 

by virtue of the level of total electric 

output for the preceding fiscal year or 

equivalent metrics that would result in 

the entity being a small entity under the 

RFA.81 Because there are no reporting or 

registration requirements in the existing 

trade option exemption, it is difficult to 

quantify the exact number of small 

entities, if any, to which the rule may 

apply, and whether such entities in the 

aggregate would constitute a substantial 

number of small entities compared to 

the universe of entities to which the rule 

could apply. However, the impact, if 

any, is largely mitigated by the 

inclusion of interim final rule § 32.3, a 

revised trade option exemption that will 

continue to be available for small 

entities that are, generally speaking, 

commercial actors entering into a 

commodity option for commercial 

purposes—including non-ECPs. 

• A description of the projected 

reporting, recordkeeping, and other 

compliance requirements of the rule, 

including an estimate of the classes of 

small entities which will be subject to 

the requirement and the type of 

professional skills necessary for 

preparation of the report or record. 

The withdrawal of the existing trade 

option exemption does not impose any 

reporting, recordkeeping, or other 

compliance requirements. However, 

because the Dodd-Frank Act provides 

that options are swaps, the swaps rules 

being promulgated under the DoddFrank Act in other rulemakings will 

contain reporting, recordkeeping, and 

other compliance requirements. In 

addition, the interim final rule trade 

option exemption at § 32.3, issued 

herein, includes certain compliance 

obligations. However, those conditions 

do not impose any significant burden or 

requirement on a small entity that has 

not been or will not be imposed through 

another rulemaking, for which the 

Commission has, in its discretion, 

addressed RFA compliance separately,82

or by self-execution of the CEA as 

amended by the Dodd-Frank Act. 

For example, the large trader 

reporting condition references part 20, 

and would only fall on part 20 reporting 

entities, SDs and clearing members, and 

not on any small entity. The position 

limits condition would only apply part 

151 position limits to the same extent 

they would apply to any other swap 

transaction entered into by the small 

entity. The SD/MSP rules from part 23 

only apply to SDs and MSPs and not to 

any small entity. The antifraud and antimanipulation condition has and will 

always apply to every entity transacting 

under the Commission’s jurisdiction. In 

addition, the part 45 recordkeeping and 

reporting requirements in the trade 

option exemption generally only require 

recordkeeping and reporting to the same 

extent that such rules apply to any other 

swap, which the Commission has 

determined does not constitute a 

significant new burden as applied in the 

context of this rulemaking. 

The new Form TO annual notice 

filing requirement further mitigates the 

burden of the reporting requirement for 

counterparties who only engage in 

unreported trade options. The form is 

necessary to give the Commission at 

least a general overview, for market 

surveillance purposes, of the 

counterparties engaging in otherwise 

unreported trade options, and the types 

and approximate value of the 

commodities involved in such options. 

The form also provides contact 

information in case Commission 

surveillance staff needs to contact trade 

option counterparties to seek more 

detailed information regarding market 

events. While Form TO is a new form, 

and thus a new requirement for those 

required to file, it is a single annual 

filing, seeking very general and easily 

accessible information. The alternative 

to using form TO would be to apply the 

full part 45 reporting regulations. 

• An identification, to the extent 

practicable, of all relevant Federal rules 

which may duplicate, overlap or 

conflict with the rule. 

Small entities that do not qualify as 

ECPs will be unable to engage in options 

transactions except on a DCM under an 

existing regulatory scheme, or if 

commercials, pursuant to the new trade 

option exemption in interim final rule 

§ 32.3. The trade option exemption at 

interim final rule § 32.3 may be relied 

upon by a non-ECP that is a producer, 

processor, or commercial user of, or a 

merchant handling the commodity that 

is the subject of the commodity option 

transaction, or the products or byproducts thereof, and that is offering or 

entering into the commodity option 

transaction solely for purposes related 

to its business as such. This provision 

will continue to permit many 

transactions that currently transact 

pursuant to the existing trade option 

exemption. The primary significant new 

requirement for trade options 

participants is the application of the 

recordkeeping and reporting 

requirement of part 45 (as well as the 

other trade option conditions, discussed 

above), and/or the Form TO notice filing 

requirement. Accordingly, there will be 

no rules applicable to the small entities, 

under the interim final rule trade option 

exemption, that duplicate, overlap, or 

conflict with any other Federal rules. 

• Description of any significant 

alternatives to the rule which 

accomplish the stated objectives of 

applicable statutes and which minimize 

any significant economic impact of the 

rule on small entities. 

These may include, for example: 

(1) The establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; 

(2) the clarification, consolidation, or 

simplification of compliance and 

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83See 44 U.S.C. 3501. 

84See 44 U.S.C. 3502. 

85See 5 CFR 1320.3(c)(1). 

86This includes any forms that relate to the 

agricultural trade option rules in current 17 CFR 

32.13 and the dealer option rules in current 17 CFR 

32.12. 

87See, e.g., Position Limits for Futures and 

Swaps, 76 FR 71626 at 71680–71683, Nov. 18, 2011; 

Large Trader Reporting for Physical Commodity 

Swaps, 76 FR 43851 at 43860–43862, July 22, 2011; 

Swap Data Recordkeeping and Reporting 

Requirements 77 FR 2136, at 2171–2176, Jan. 13, 

2012; and Swap Dealer and Major Swap Participant 

Recordkeeping and Reporting, Duties, and Conflicts 

of Interest Policies and Procedures; Futures 

Commission Merchant and Introducing Broker 

Conflicts of Interest Policies and Procedures; Swap 

Dealer, Major Swap Participant, and Futures 

Commission Merchant Chief Compliance Officer, 77 

FR 20128, Apr. 3, 2012. 

reporting requirements under the rule 

for such small entities; (3) the use of 

performance rather than design 

standards; and (4) an exemption from 

coverage of the rule, or any part thereof, 

for such small entities. 

A potential alternative to limiting 

trade options under the existing trade 

option exemption to the requirements 

under interim final rule § 32.3 (i.e., 

commercial participants and physically 

settled options) would be to either (1) 

delete the existing trade option and not 

replace it, or (2) create a special rule to 

allow any non-ECP to engage in such 

transactions and to allow such 

transactions to be either physically or 

financially settled. As explained in this 

document, and as stressed by the 

commenters, to adopt option (1) as a 

final rule (deleting the trade option 

provision altogether) would have been 

prohibitively costly and would have had 

a significant negative impact on hedging 

opportunities available to small entities. 

With regard to option (2), and as 

described above, interim final rule 

§ 32.3 provides an exemption for certain 

commercial parties entering into 

physical commodity options for 

commercial purposes. Based on the 

comments received in response to the 

NPRM, discussed above, the 

Commission has determined that to treat 

all trade options in the same manner as 

any other swap (including permitting 

commodity options for all participants 

on a DCM), with the addition of the 

trade option exemption at § 32.3, will 

provide an appropriate and flexible 

framework for the overwhelming 

majority of commodity options 

participants that will seek to rely on the 

trade option exemption. In addition, to 

retain a trade option exemption with no 

participant requirements and no 

physical delivery requirement would 

potentially undermine many of the 

market and consumer protections 

embodied in the swaps provisions of the 

Dodd-Frank Act. 

C. Paperwork Reduction Act 

The purposes of the Paperwork 

Reduction Act of 1995, 44 U.S.C. 3501 

et seq. (‘‘PRA’’) are, among other things, 

to minimize the paperwork burden to 

the private sector, ensure that any 

collection of information by a 

government agency is put to the greatest 

possible uses, and minimize duplicative 

information collections across the 

government.83 The PRA applies to all 

information, ‘‘regardless of form or 

format,’’ whenever the government is 

‘‘obtaining, causing to be obtained [or] 

soliciting’’ information, and includes 

required ‘‘disclosure to third parties or 

the public, of facts or opinions,’’ when 

the information collection calls for 

‘‘answers to identical questions posed 

to, or identical reporting or 

recordkeeping requirements imposed 

on, ten or more persons.’’ 84 The PRA 

requirements have been determined to 

include not only mandatory but also 

voluntary information collections, and 

include both written and oral 

communications.85 Under the PRA’’, an 

agency may not conduct or sponsor, and 

a person is not required to respond to, 

a collection of information unless it 

displays a currently valid control 

number from the Office of Management 

and Budget (‘‘OMB’’). With the 

exception of the new Form TO annual 

notice filing requirement, discussed 

below, the Commission believes that 

these rules will not impose any new 

information collection requirements that 

require approval of OMB under the 

PRA. The Commission notes that these 

rules will involve the withdrawal of 

certain provisions related to 

Commission forms, and will ultimately 

result in the expiration, cancellation, or 

removal of such forms.86 Because the 

rules would ultimately result in 

removing or deleting form filing and/or 

recordkeeping burdens, they will not 

result in the creation of any new 

information collection subject to OMB 

review or approval under the PRA, 

except for the new Form TO annual 

notice filing requirement discussed 

below. As a general matter, these rules 

would allow commodity options to 

trade under the same terms and 

conditions as all other swaps and these 

rules do not, by themselves, impose any 

new information collection 

requirements other than those that exist 

or have been proposed in the 

Commission’s general swap-related 

Dodd-Frank rulemakings. The same 

analysis applies with respect to the 

general conditions applicable under the 

trade option exemption in § 32.3(b)— 

which conditions would only apply to 

the same extent they would apply to any 

other swap. Similarly, the application of 

the part 45 recordkeeping and reporting 

requirements to trade options, via 

interim final rule § 32.3(b), only 

imposes such requirements to the same 

extent they would apply to any other 

swap. That is, these specific 

recordkeeping and reporting costs have 

been accounted for in the information 

collection prepared by the Commission 

with respect to its part 45 rules. Also, 

collections of information that may be 

associated with engaging in commodity 

options or trade options are, or will be, 

addressed within each of the general 

swap-related rulemakings implementing 

the Dodd-Frank Act.87 To avoid creating 

duplicative PRA estimates, the 

Commission is not accounting again for 

those costs with respect to this 

rulemaking. Therefore, this final rule 

and interim final rule do not constitute 

a new collection of information by the 

Commission, other than those that may 

be associated with the new Form TO 

annual notice filing requirement. 

As noted above, the interim final rule 

imposes a new Form TO annual notice 

filing requirement on counterparties to 

unreported trade options, which 

requirement is considered to be a 

collection of information within the 

meaning of the PRA. The Commission 

therefore is required to submit to OMB 

an information collection request for 

review and approval in accordance with 

44 U.S.C. 3506(c)(2)(A) and 5 CFR 

1320.8(d). The Commission will, by 

separate action, publish in the Federal 

Register a notice and request for 

comment on the paperwork burden 

associated with the interim final rule’s 

Form TO annual notice filing 

requirement in accordance with 5 CFR 

1320.8 and 1320.10. If approved, this 

new collection of information will be 

mandatory. As noted above, the Form 

TO annual notice filing would not be 

due to the Commission for the first time 

until March 1, 2014, for counterparties 

that enter into one or more unreported 

trade options during the 2013 calendar 

year. 

The Commission specifically invites 

public comment on the accuracy of its 

estimate that no additional information 

collection requirements or changes to 

existing collection requirements, other 

than Form TO, would result from the 

interim final rule trade option 

exemption issued herein. 

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25338 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

VIII. Final Rule and Interim Final Rule 

List of Subjects 

17 CFR Part 3 

Administrative practice and 

procedure, Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 32 

Commodity futures, Consumer 

protection, Fraud, Reporting and 

recordkeeping requirements. 

17 CFR Part 33 

Commodity futures, Consumer 

protection, Fraud, Reporting and 

recordkeeping requirements. 

In consideration of the foregoing and 

pursuant to the authority contained in 

the Act, as indicated herein, the 

Commission hereby amends chapter I of 

title 17 of the Code of Federal 

Regulations as follows: 

PART 3—REGISTRATION 

■ 1. The authority citation for part 3 

continues to read as follows: 

Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 

2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 

6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 

18, 19, 21, and 23, as amended by Title VII 

of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (July 21, 2010). 

§ 3.13 [Removed and Reserved] 

■ 2. Remove and reserve § 3.13. 

■ 3. Revise part 32 to read as follows: 

PART 32—REGULATION OF 

COMMODITY OPTION TRANSACTIONS 

Sec. 

32.1 Scope. 

32.2 Commodity option transactions; 

general authorization. 

32.3 Trade options. 

32.4 Fraud in connection with commodity 

option transactions. 

32.5 Option transactions entered into prior 

to the effective date of this part. 

Appendix A to 17 CFR Part 32 

Authority: 7 U.S.C. 1a, 2, 6c, and 12a, 

unless otherwise noted. 

§ 32.1 Scope. 

The provisions of this part shall apply 

to all commodity option transactions, 

except for commodity option 

transactions on a contract of sale of a 

commodity for future delivery 

conducted or executed on or subject to 

the rules of either a designated contract 

market or a foreign board of trade. 

§ 32.2 Commodity option transactions; 

general authorization. 

Subject to §§ 32.1, 32.4, and 32.5, 

which shall in any event apply to all 

commodity option transactions, it shall 

be unlawful for any person or group of 

persons to offer to enter into, enter into, 

confirm the execution of, maintain a 

position in, or otherwise conduct 

activity related to any transaction in 

interstate commerce that is a commodity 

option transaction, unless: 

(a) Such transaction is conducted in 

compliance with and subject to the 

provisions of the Act, including any 

Commission rule, regulation, or order 

thereunder, otherwise applicable to any 

other swap, or 

(b) Such transaction is conducted 

pursuant to § 32.3. 

§ 32.3 Trade options. 

(a) Subject to paragraphs (b), (c), and 

(d) of this section, the provisions of the 

Act, including any Commission rule, 

regulation, or order thereunder, 

otherwise applicable to any other swap 

shall not apply to, and any person or 

group of persons may offer to enter into, 

enter into, confirm the execution of, 

maintain a position in, or otherwise 

conduct activity related to, any 

transaction in interstate commerce that 

is a commodity option transaction, 

provided that: 

(1) Such commodity option 

transaction must be offered by a person 

that has a reasonable basis to believe 

that the transaction is offered to an 

offeree as described in paragraph (a)(2) 

of this section. In addition, the offeror 

must be either: 

(i) An eligible contract participant, as 

defined in section 1a(18) of the Act, as 

further jointly defined or interpreted by 

the Commission and the Securities and 

Exchange Commission or expanded by 

the Commission pursuant to section 

1a(18)(C) of the Act; or 

(ii) A producer, processor, or 

commercial user of, or a merchant 

handling the commodity that is the 

subject of the commodity option 

transaction, or the products or byproducts thereof, and such offeror is 

offering or entering into the commodity 

option transaction solely for purposes 

related to its business as such; 

(2) The offeree must be a producer, 

processor, or commercial user of, or a 

merchant handling the commodity that 

is the subject of the commodity option 

transaction, or the products or byproducts thereof, and such offeree is 

offered or entering into the commodity 

option transaction solely for purposes 

related to its business as such; and 

(3) The commodity option must be 

intended to be physically settled, so 

that, if exercised, the option would 

result in the sale of an exempt or 

agricultural commodity for immediate 

or deferred shipment or delivery. 

(b) In connection with any commodity 

option transaction entered into pursuant 

to paragraph (a) of this section, every 

counterparty shall comply with the 

swap data recordkeeping requirements 

of part 45 of this chapter, as otherwise 

applicable to any swap transaction, and 

shall: 

(1) Comply with the swap data 

reporting requirements of part 45 of this 

chapter to the extent that the 

commodity option involves at least one 

counterparty (whether as offeror or 

offeree) that has— 

(i) Become obligated to comply with 

the reporting requirements of part 45, 

(ii) As a reporting party, 

(iii) During the twelve month period 

preceding the date on which the trade 

option is entered into, 

(iv) In connection with any non-trade 

option swap trading activity; or 

(2) For any counterparty that enters 

into one or more commodity options 

pursuant to § 32.3(a) in a calendar year 

that do not involve a counterparty 

described in paragraph (b)(1) of this 

section, file with the Commission by 

March 1 of the following year an 

‘‘Annual Notice Filing for 

Counterparties to Unreported Trade 

Options’’ on Form TO, as set forth in 

Appendix A to this part, to be 

completed and submitted in accordance 

with the instructions thereto and as 

further directed by the Commission. 

(c) In connection with any commodity 

option transaction entered into pursuant 

to paragraph (a) of this section, the 

following provisions shall apply to 

every trade option counterparty to the 

same extent that such provisions would 

apply to such person in connection with 

any other swap: 

(1) Part 20 (Swaps Large Trader 

Reporting) of this chapter; 

(2) Part 151 (Position Limits) of this 

chapter; 

(3) Subpart J of part 23 (Duties of 

Swap Dealers and Major Swap 

Participants) of this chapter; 

(4) Sections 23.200, 23.201, 23.203, 

and 23.204 of subpart F of part 23 

(Reporting and Recordkeeping 

Requirements for Swap Dealers and 

Major Swap Participants) of this 

chapter; and 

(5) Section 4s(e) of the Act (Capital 

and Margin Requirements for Swap 

Dealers and Major Swap Participants). 

(d) In addition, any person or group 

of persons offering to enter into, 

entering into, confirming the execution 

of, maintaining a position in, or 

otherwise conducting activity related to 

a commodity option transaction in 

interstate commerce pursuant to 

paragraph (a) of this section shall 

remain subject to part 180 (Prohibition 

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Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 25339 

Against Manipulation) and § 23.410 

(Prohibition on Fraud, Manipulation, 

and other Abusive Practices) of this 

chapter and the antifraud, antimanipulation, and enforcement 

provisions of CEA sections 2, 4b, 4c, 4o, 

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

13. 

(e) The Commission may, by order, 

upon written request or upon its own 

motion, exempt any person, either 

unconditionally or on a temporary or 

other conditional basis, from any 

provisions of this part, and the 

provisions of the Act, including any 

Commission rule, regulation, or order 

thereunder, otherwise applicable to any 

other swap, other than § 32.4, part 180 

(Prohibition Against Manipulation), and 

§ 23.410 (Prohibition on Fraud, 

Manipulation, and other Abusive 

Practices) of this chapter, and the 

antifraud, anti-manipulation, and 

enforcement provisions of CEA sections 

2, 4b, 4c, 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6, 

6c, 6d, 9, 13, if it finds, in its discretion, 

that it would not be contrary to the 

public interest to grant such exemption. 

§ 32.4 Fraud in connection with 

commodity option transactions. 

In or in connection with an offer to 

enter into, the entry into, or the 

confirmation of the execution of, any 

commodity option transaction, it shall 

be unlawful for any person directly or 

indirectly: 

(a) To cheat or defraud or attempt to 

cheat or defraud any other person; 

(b) To make or cause to be made to 

any other person any false report or 

statement thereof or cause to be entered 

for any person any false record thereof; 

or 

(c) To deceive or attempt to deceive 

any other person by any means 

whatsoever. 

§ 32.5 Option transactions entered into 

prior to the effective date of this part. 

Nothing contained in this part shall 

be construed to affect any lawful 

activities that occurred prior to the 

effective date of this part. 

Appendix A to 17 CFR Part 32 

BILLING CODE P 

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BILLING CODE C 

PART 33—REGULATION OF 

COMMODITY OPTION TRANSACTIONS 

THAT ARE OPTIONS ON CONTRACTS 

OF SALE OF A COMMODITY FOR 

FUTURE DELIVERY 

■ 4. The authority citation for part 33 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a–1, 13b, 

19, and 21, otherwise noted. 

■ 5. Revise the part heading to read as 

set forth above. 

■ 6. In § 33.2, revise paragraph (b) to 

read as follows: 

§ 33.2 Applicability of Act and rules; scope 

of part 33. 

* * * * * 

(b) The provisions of this part apply 

to commodity option transactions that 

are options on contracts of sale of a 

commodity for future delivery except 

for commodity option transactions that 

are options on contracts of sale of a 

commodity for future delivery 

conducted or executed on or subject to 

the rules of a foreign board of trade. 

* * * * * 

§ 33.4 [Amended] 

■ 7. Amend § 33.4 as follows: 

■ a. Remove the words ‘‘or for options 

on physicals in any commodity 

regulated under the Act,’’ in the 

introductory text; 

■ b. Remove and reserve paragraphs 

(a)(4) and (a)(5)(iv); 

■ c. Remove the phrase ‘‘or underlying 

physical’’ from paragraph (b)(1)(iii); and 

■ d. Remove the phrase ‘‘, options on 

physicals,’’ from paragraph (d)(3). 

■ 8. In § 33.7: 

■ a. Amend paragraph (b) introductory 

text by revising the second paragraph of 

the Options Disclosure Statement; 

■ b. Remove the phrase ‘‘or underlying 

physical commodity’’ wherever it 

appears in paragraph (b)(1) including its 

undesignated paragraphs; 

■ c. Remove the phrase ‘‘(e.g., 

commitment to sell the physical)’’ from 

the fourth undesignated paragraph 

under paragraph (b)(1); 

■ d. Revise the fifth undesignated 

paragraph under paragraph (b)(1); 

■ e. Remove the phrase ‘‘or physical 

commodity’’ from paragraph (b)(2) 

introductory text and paragraph (b)(2)(i); 

■ f. Remove the phrase ‘‘or underlying 

physical commodity’’ from paragraph 

(b)(5) both times it appears; 

■ j. Revise the undesignated paragraph 

following paragraph (b)(5); 

■ k. Remove the phrase ‘‘or underlying 

physical commodity’’ from paragraph 

(b)(6); 

■ l. Remove the phrase ‘‘or the physical 

commodity’’ and the phrase ‘‘or 

underlying physical commodity’’ from 

paragraph (b)(7)(ii); 


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25344 Federal Register / Vol. 77, No. 82 / Friday, April 27, 2012 / Rules and Regulations 

■ m. Remove and reserve paragraph 

(b)(7)(iv); and 

■ o. Remove the phrase ‘‘or underlying 

physical commodity’’ from paragraphs 

(b)(7)(v) and (x). 

The revisions read as follows: 

§ 33.7 Disclosure. 

* * * * * 

(b) * * * 

Options Disclosure Statement 

* * * * * 

BOTH THE PURCHASER AND THE 

GRANTOR SHOULD KNOW THAT THE 

OPTION IF EXERCISED, RESULTS IN 

THE ESTABLISHMENT OF A 

FUTURES CONTRACT (AN ‘‘OPTION 

ON A FUTURES CONTRACT’’). 

* * * * * 

(1) * * * 

The grantor of a put option on a 

futures contract who has a short 

position in the underlying futures 

contract is subject to the full risk of a 

rise in the price in the underlying 

position reduced by the premium 

received for granting the put. In 

exchange for the premium received for 

granting a put option on a futures 

contract, the option grantor gives up all 

of the potential gain resulting from a 

decrease in the price of the underlying 

futures contract below the option strike 

price upon exercise or expiration of the 

option. 

* * * * * 

(5) * * * 

Also, an option customer should be 

aware of the risk that the futures price 

prevailing at the opening of the next 

trading day may be substantially 

different from the futures price which 

prevailed when the option was 

exercised. 

* * * * * 

Issued in Washington, DC, on April 18, 

2012, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

Appendices to Commodity Options 

Final Rule and Interim Final Rule— 

Commission Voting Summary and 

Statements of Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Sommers, Chilton, O’Malia, 

and Wetjen voted in the affirmative; no 

commissioner voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rules on Commodity 

Options. The Dodd-Frank Wall Street Reform 

and Consumer Protection Act includes 

commodity options within the statutory 

definition of ‘‘swap.’’ The final rule confirms 

that the same rules apply to commodity 

options as are applicable to other swaps, just 

as the law directs. In addition, the 

Commodity Futures Trading Commission 

will consider and seek comment on an 

interim final rule to provide a trade option 

exemption for certain commodity options 

that are physically delivered. 

We received a lot of feedback from 

commercial market participants that 

commodity options used by commercial 

entities to deliver or receive physical 

commodities in connection with their 

business don’t need the same level of 

oversight as swaps. However, trade options 

will still be subject to position limits, 

appropriate reporting and recordkeeping 

requirements, and anti-fraud and antimanipulation rules. The Commission is 

seeking additional comments on the trade 

option exemption, but the interim final rule 

makes the relief immediate. 

[FR Doc. 2012–9888 Filed 4–26–12; 8:45 am] 

BILLING CODE P 

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