Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 69073 

The Proposal 

This action proposes to amend Title 

14, Code of Federal Regulations (14 

CFR), Part 71 by establishing Class E 

airspace extending upward from 700 

feet above the surface within a 6.5-mile 

radius of Tribune Municipal Airport, 

Tribune, KS, to accommodate new 

standard instrument approach 

procedures. Controlled airspace is 

needed for the safety and management 

of IFR operations at the airport. 

Class E airspace areas are published 

in Paragraph 6005 of FAA Order 

7400.9Y, dated August 6, 2014 and 

effective September 15, 2014, which is 

incorporated by reference in 14 CFR 

71.1. The Class E airspace designation 

listed in this document will be 

published subsequently in the Order. 

The FAA has determined that this 

proposed regulation only involves an 

established body of technical 

regulations for which frequent and 

routine amendments are necessary to 

keep them operationally current. It, 

therefore, (1) is not a ‘‘significant 

regulatory action’’ under Executive 

Order 12866; (2) is not a ‘‘significant 

rule’’ under DOT Regulatory Policies 

and Procedures (44 FR 11034; February 

26, 1979); and (3) does not warrant 

preparation of a Regulatory Evaluation 

as the anticipated impact is so minimal. 

Since this is a routine matter that will 

only affect air traffic procedures and air 

navigation, it is certified that this rule, 

when promulgated, will not have a 

significant economic impact on a 

substantial number of small entities 

under the criteria of the Regulatory 

Flexibility Act. 

The FAA’s authority to issue rules 

regarding aviation safety is found in 

Title 49 of the U.S. Code. Subtitle 1, 

Section 106 describes the authority of 

the FAA Administrator. Subtitle VII, 

Aviation Programs, describes in more 

detail the scope of the agency’s 

authority. This rulemaking is 

promulgated under the authority 

described in Subtitle VII, Part A, 

Subpart I, Section 40103. Under that 

section, the FAA is charged with 

prescribing regulations to assign the use 

of airspace necessary to ensure the 

safety of aircraft and the efficient use of 

airspace. This regulation is within the 

scope of that authority as it would 

establish controlled airspace at Tribune 

Municipal Airport, Tribune, KS. 

Environmental Review 

This proposal will be subject to an 

environmental analysis in accordance 

with FAA Order 1050.1E, 

‘‘Environmental Impacts: Policies and 

Procedures’’ prior to any FAA final 

regulatory action. 

List of Subjects in 14 CFR Part 71 

Airspace, Incorporation by reference, 

Navigation (air). 

The Proposed Amendment 

In consideration of the foregoing, the 

Federal Aviation Administration 

proposes to amend 14 CFR part 71 as 

follows: 

PART 71—DESIGNATION OF CLASS A, 

B, C, D, AND E AIRSPACE AREAS; AIR 

TRAFFIC SERVICE ROUTES; AND 

REPORTING POINTS 

■ 1. The authority citation for part 71 

continues to read as follows: 

Authority: 49 U.S.C. 106(g); 40103, 40113, 

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959– 

1963 Comp., p. 389. 

§ 71.1 [Amended] 

■ 2. The incorporation by reference in 

14 CFR 71.1 of FAA Order 7400.9Y, 

Airspace Designations and Reporting 

Points, dated August 6, 2014, and 

effective September 15, 2014, is 

amended as follows: 

Paragraph 6005 Class E airspace areas 

extending upward from 700 feet or more 

above the surface of the earth. 

* * * * * 

ACE KS E5 Tribune, KS [New] 

Tribune Municipal Airport, KS 

(Lat. 38°27′05′′ N., long. 101°45′00′′ W.) 

That airspace extending upward from 700 

feet above the surface within a 6.5-mile 

radius of Tribune Municipal Airport. 

Issued in Fort Worth, TX, on November 12, 

2014. 

Robert W. Beck, 

Manager, Operations Support Group, ATO 

Central Service Center. 

[FR Doc. 2014–27537 Filed 11–19–14; 8:45 am] 

BILLING CODE 4901–14–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 1 

RIN 3038–AE24 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 230, 240 and 241 

[Release No. 33–9681; 34–73584; File No. 

S7–16–11] 

RIN 3235–AK65 

Forward Contracts With Embedded 

Volumetric Optionality 

AGENCY: Commodity Futures Trading 

Commission; Securities and Exchange 

Commission. 

ACTION: Proposed interpretation. 

SUMMARY: In accordance with section 

712(d)(4) of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(the ‘‘Dodd-Frank Act’’), the Commodity 

Futures Trading Commission (the 

‘‘CFTC’’) and the Securities and 

Exchange Commission (‘‘SEC’’), after 

consultation with the Board of 

Governors of the Federal Reserve 

System (‘‘Board of Governors’’), are 

jointly issuing the CFTC’s proposed 

clarification of its interpretation 

concerning forward contracts with 

embedded volumetric optionality. The 

CFTC invites public comment on all 

aspects of its proposed interpretation. 

DATES: Comments must be received on 

or before December 22, 2014. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AE24, 

by any of the following methods: 

• CFTC Web site: at http://

comments.cftc.gov. Follow the 

instructions for submitting comments 

through the Web site. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Secretary of the Commission, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

Mail, above. 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 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 


rmajette on DSK2VPTVN1PROD with PROPOSALS
69074 Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 

1See 77 FR 48207, 48238–42 (Aug. 13, 2012). 

2See 7 U.S.C. 1a(47)(B)(ii) (excluding from the 

definition of ‘‘swap’’ ‘‘any sale of a nonfinancial 

commodity or security for deferred shipment or 

delivery, so long as the transaction is intended to 

be physically settled’’); 1a(27) (excluding from the 

definition of ‘‘future delivery’’ ‘‘any sale of any cash 

commodity for deferred shipment or delivery’’). 

3See 77 FR 48238–42 & n.335. See also id. at 

48227–36 (providing the CFTC’s interpretation 

regarding the forward contract exclusion for 

nonfinancial commodities). 

4See id. at 48237–39 (citing In re Wright, CFTC 

Docket No. 97–02, 2010 WL 4388247 (CFTC Oct. 25, 

2010), and Characteristics Distinguishing Cash and 

Forward Contracts and ‘‘Trade’’ Options, 50 FR 

39656 (Sept. 30, 1985) (‘‘1985 CFTC OGC 

Interpretation’’)). 

5See id. at 48236–37; 7 U.S.C. 1a(47)(A)(i) 

(defining ‘‘swap’’ to include ‘‘[an] option of any 

kind that is for the purchase or sale, or based on 

the value, of 1 or more . . . commodities . . .’’) 

(emphasis added). Part 32 of the CFTC’s regulations 

includes an exemption for certain physically settled 

options, termed ‘‘trade options.’’ See 17 C.F.R. 32.3. 

The trade option exemption is currently subject to 

CFTC staff no-action relief. See CFTC Letter No. 13– 

08 (April 5, 2013), available at http://www.cftc.gov/ 

ucm/groups/public/@lrlettergeneral/documents/

letter/13-08.pdf. 

6The Products Release included a request for 

comment on the CFTC’s interpretation. See 77 FR 

48241–42. CFTC staff also solicited comments in 

connection with a public roundtable to discuss 

issues concerning end users and the Dodd-Frank 

Act. These comments are available at http://

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1256 and http://

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1485, respectively. 

7Section 712(d)(4) provides that ‘‘[a]ny 

interpretation of, or guidance by either Commission 

regarding, a provision of this title, shall be effective 

only if issued jointly by the Commodity Futures 

Trading Commission and the Securities and 

Exchange Commission, after consultation with the 

Board of Governors, if this title requires the 

Commodity Futures Trading Commission and the 

Securities and Exchange Commission to issue joint 

regulations to implement the provision.’’ While the 

Dodd-Frank Act would require this interpretation to 

be issued jointly by the CFTC and the SEC, it would 

be an interpretation solely of the CFTC and would 

not apply to the exclusion from the swap and 

security-based swap definitions for security 

forwards or to the distinction between security 

forwards and security futures products. 

8See 77 FR 48238. 

9As described in the Products Release, the fifth 

element did not appear to contemplate 

circumstances where the seller of the nonfinancial 

commodity might exercise the embedded 

volumetric optionality. See 77 FR 48238 (‘‘The 

buyer of a nonfinancial commodity underlying the 

agreement, contract or transaction with embedded 

volumetric optionality intends, at the time it enters 

into the agreement, contract, or transaction, to take 

delivery of the underlying nonfinancial commodity 

if it exercises the embedded volumetric 

optionality.’’) (emphasis added). 

10See 77 FR 48238–39. 

confidential treatment of the exempt 

information may be submitted according 

to the procedures established in § 145.9 

of the CFTC’s regulations, 17 CFR 145.9. 

The CFTC reserves the right, but shall 

have no obligation, to review, prescreen, filter, redact, refuse or remove 

any or all of a submission from http:// 

www.cftc.gov that it may deem to be 

inappropriate for publication, such as 

obscene language. All submissions that 

have been redacted or removed that 

contain comments on the merits of the 

notice will be retained in the public 

comment file and will be considered as 

required under all applicable laws, and 

may be accessible under the Freedom of 

Information Act. 

FOR FURTHER INFORMATION CONTACT: 

CFTC: Elise Pallais, Attorney Advisor, 

(202) 418–5577, epallais@cftc.gov, 

Office of the General Counsel, 

Commodity Futures Trading 

Commission, 1155 21st Street NW., 

Washington, DC 20581. SEC: Carol 

McGee, Assistant Director, (202) 551– 

5870, mcgeec@sec.gov, Office of 

Derivatives Policy, Division of Trading 

and Markets, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

In Further Definition of ‘‘Swap,’’ 

Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; 

Security-Based Swap Agreement 

Recordkeeping (the ‘‘Products Release’’), 

the CFTC provided an interpretation, in 

response to requests from commenters, 

with respect to forward contracts that 

provide for variations in delivery 

amount (i.e., that contain ‘‘embedded 

volumetric optionality’’).1 Specifically, 

the CFTC identified when an agreement, 

contract, or transaction would fall 

within the forward contract exclusion 

from the ‘‘swap’’ and ‘‘future delivery’’ 

definitions in the Commodity Exchange 

Act (the ‘‘CEA’’) 2 notwithstanding that 

it contains embedded volumetric 

optionality.3 In providing its 

interpretation, the CFTC was guided by 

and sought to reconcile agency 

precedent regarding forward contracts 

containing embedded optionality 4 with 

the statutory definition of ‘‘swap’’ in 

section 1a(47) of the CEA, which 

provides, among other things, that 

commodity options are swaps, even if 

physically settled.5

The CFTC has received several 

comments from market participants 

requesting that it modify or further 

clarify its interpretation.6 According to 

commenters, uncertainty with regard to 

the meaning of certain language in the 

CFTC’s interpretation, particularly the 

seventh element, has led to confusion 

among market participants with regard 

to how to characterize certain 

transactions, whether as excluded 

forward contracts with embedded 

volumetric optionality or regulated 

trade options. 

II. Proposed Interpretation 

In response to commenters, the CFTC 

is proposing to clarify its interpretation 

of when an agreement, contract, or 

transaction with embedded volumetric 

optionality would be considered a 

forward contract.7 Accordingly, the 

CFTC is proposing to provide that an 

agreement, contract, or transaction falls 

within the forward exclusion from the 

swap and future delivery definitions, 

notwithstanding that it contains 

embedded volumetric optionality, 

when: 

1. The embedded optionality does not 

undermine the overall nature of the 

agreement, contract, or transaction as a 

forward contract; 

2. The predominant feature of the 

agreement, contract, or transaction is 

actual delivery; 

3. The embedded optionality cannot 

be severed and marketed separately 

from the overall agreement, contract, or 

transaction in which it is embedded; 

4. The seller of a nonfinancial 

commodity underlying the agreement, 

contract, or transaction with embedded 

volumetric optionality intends, at the 

time it enters into the agreement, 

contract, or transaction to deliver the 

underlying nonfinancial commodity if 

the embedded volumetric optionality is 

exercised; 

5. The buyer of a nonfinancial 

commodity underlying the agreement, 

contract or transaction with embedded 

volumetric optionality intends, at the 

time it enters into the agreement, 

contract, or transaction, to take delivery 

of the underlying nonfinancial 

commodity if the embedded volumetric 

optionality is exercised; 

6. Both parties are commercial parties; 

and 

7. The embedded volumetric 

optionality is primarily intended, at the 

time that the parties enter into the 

agreement, contract, or transaction, to 

address physical factors or regulatory 

requirements that reasonably influence 

demand for, or supply of, the 

nonfinancial commodity. 

The first six elements are largely 

unchanged from the Products Release.8

Among them, the CFTC is proposing to 

modify only the fourth and fifth 

elements, to clarify that the CFTC’s 

interpretation applies to embedded 

volumetric optionality in the form of 

both puts and calls.9 Accordingly, the 

CFTC’s discussion of these six elements 

in the Products Release would remain 

relevant and applicable.10

The seventh element addresses the 

primary reason for including embedded 


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Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 69075 

11See, e.g., Letter from ONEOK, Inc. (July 22, 

2011) at 4 (stating that ‘‘day-to-day changes in 

demand’’ for natural gas ‘‘may be caused by 

variation in weather, operational considerations, or 

other factors’’); Letter from the American Gas 

Association (Oct. 12, 2012) at 9 (stating that 

‘‘weather-sensitive demands’’ for natural gas 

‘‘cannot be accurately predicted in advance’’). 

12See, e.g., Letter from the Commodity Markets 

Council, the National Corn Growers Association, 

and the Natural Gas Supply Association (April 17, 

2014) at 2 (‘‘Physical end-users need these contracts 

to address supply input or production output 

uncertainty associated with the operation of a 

physical business.’’); Letter from the Plains All 

American Pipeline, L.P. (April 17, 2014) at 2 (‘‘Such 

contracts provide us with the ability to allow our 

customers flexibility to increase or decrease the 

amount of purchase or sale of a commodity in 

response to prevailing market conditions.’’). 

13See 77 FR 48228 (describing a forward contract 

as a ‘‘commercial merchandising transaction’’ in 

which delivery is delayed for ‘‘commercial 

convenience or necessity’’). 

14See 77 FR 48228 (‘‘The primary purpose of a 

forward contract is to transfer ownership of the 

commodity and not to transfer solely its price 

risk.’’). See also Letter from the Commodity Markets 

Council, the National Corn Growers Association, 

and the Natural Gas Supply Association (April 17, 

2014) at 2 (‘‘[Contracts with volumetric optionality] 

exist to permit end-users to have agreements in 

place so that they can effectively and economically 

manage the purchase or sale of commodities related 

to their commercial businesses, not as a substitute 

for a financially settled contract or for speculative 

purposes.’’); Letter from ONEOK, Inc. (July 22, 

2011) at 7 (‘‘Although the amounts that can be taken 

on delivery may vary, the primary intent of the 

contracts is not to provide price protection, which 

is clearly the intent of the contracts described in the 

[1985 CFTC] OGC Interpretation as trade options.’’). 

15As stated in the Products Release, the seventh 

element reads as follows: 

The exercise or non-exercise of the embedded 

volumetric optionality is based primarily on 

physical factors, or regulatory requirements, that are 

outside the control of the parties and are 

influencing demand for, or supply of, the 

nonfinancial commodity. 

77 FR 48238 (footnotes omitted). 

16See 77 FR 48228 (‘‘In assessing the parties’ 

expectations or intent regarding delivery, the CFTC 

consistently has applied a ‘facts and circumstances’ 

test.’’); Letter from ONEOK, Inc. (July 22, 2011) at 

6 (‘‘The intent of the parties to defer delivery of a 

varying amount can be ascertained based on 

objective criteria, such as the pattern of deliveries 

in relation to variation in weather, customer 

demand, or other similar factors.’’). 

17See, e.g., Letter from the Commodity Markets 

Council, the National Corn Growers Association, 

and the Natural Gas Supply Association (April 17, 

2014) at 2 & n.3 (stating that commercial parties are 

‘‘being asked for vague (and, therefore, potentially 

unenforceable) representations’’ because ‘‘the 

question of the reason for exercise of volumetric 

optionality can vary from transaction to transaction 

and is not known until the time of exercise’’); Letter 

from the American Gas Association (April 17, 2014) 

at 10 (citing ‘‘widespread confusion as to whether 

counterparties must demonstrate forward contract 

status as of the time of entering into an agreement, 

or as of the time of exercise or non-exercise of 

delivery rights under the agreement.’’). 

18For example, in choosing whether to obtain 

additional supply by exercising the embedded 

volumetric optionality under a given contract or 

turning to another supply source—whether storage, 

the spot market, or another forward contract with 

embedded volumetric optionality—commercial 

parties would be able to consider a variety of 

factors, including price, provided that the intended 

purpose for including the embedded volumetric 

optionality in the contract at contract initiation was 

to address physical factors or regulatory 

requirements influencing the demand for or supply 

of the commodity. 

19See Letter from BG Americas & Global LNG 

(July 22, 2011) at 4 (‘‘Variability associated with an 

energy customer’s physical demand is influenced 

by factors outside the control of the energy 

suppliers (and sometimes the consumers) . . .’’); 

Letter from the Working Group of Commercial 

Energy Firms (July 22, 2011) at 8 (‘‘Availability of 

production and requirements for consumption are 

often influenced by factors outside the control of 

the parties to an energy commodity transaction and 

can change on an hourly or daily basis.’’) (emphasis 

added). 

20Letter from the Plains All American Pipeline, 

L.P. (April 17, 2014) at 3 (‘‘[M]any counterparties 

understand the [seventh element] to have failed 

when a counterparty has more than one alternative 

to meet its physical commodity needs, therefore 

making the choice of supply ‘within its control.’’’); 

Letter from the Commodity Markets Council, the 

National Corn Growers Association, and the Natural 

Gas Supply Association (April 17, 2014) at 2–3 

(listing as an issue stemming from the ambiguity in 

the seventh element ‘‘uncertainty as to whether 

end-users with more than one supply choice are 

always exercising optionality within their control’’). 

21The CFTC reiterates that, as stated in the 

Products Release, system reliability issues that lead 

to voluntary supply curtailments would be 

Continued 

volumetric optionality in a forward 

contract. As commenters have 

explained, commercial parties are often 

unable to accurately predict their exact 

delivery needs or production capacity 

for a given nonfinancial commodity at 

contract initiation due to a variety of 

factors, such as weather and certain 

other ‘‘operational considerations’’ (e.g., 

transportation capacity).11 The 

embedded volumetric optionality 

therefore offers commercial parties the 

flexibility to vary the amount of the 

nonfinancial commodity delivered 

during the life of the contract in 

response to uncertainty in the demand 

for or supply of the nonfinancial 

commodity.12

The seventh element ensures that this 

purpose, consistent with the historical 

interpretation of a forward contract,13 is 

the primary purpose for including 

embedded volumetric optionality in the 

contract. In other words, the embedded 

volumetric optionality must primarily 

be intended as a means of assuring a 

supply source or providing delivery 

flexibility in the face of uncertainty 

regarding the quantity of the 

nonfinancial commodity that may be 

needed or produced in the future, 

consistent with the purposes of a 

forward contract.14

In response to commenters, the CFTC 

is proposing to modify the seventh 

element to further clarify its 

interpretation.15 To begin, the CFTC is 

proposing to remove reference to the 

‘‘exercise or non-exercise’’ of the 

embedded volumetric optionality. This 

language was included to embody the 

longstanding principle, recognized by 

commenters, that intent may be 

ascertained by the relevant facts and 

circumstances surrounding the contract, 

including the parties’ course of 

performance thereunder.16 According to 

commenters, however, this language has 

created problems during contract 

negotiations, because certain parties feel 

pressure to specify the exact factors that 

could lead to the exercise or nonexercise of the volumetric optionality.17

By removing this language, the CFTC 

intends to clarify that the focus of the 

seventh element is intent with respect to 

the embedded volumetric optionality at 

the time of contract initiation.18 The 

CFTC would further advise commercial 

parties that they may rely on 

counterparty representations with 

respect to the intended purpose for 

embedding volumetric optionality in the 

contract, provided they are unaware, 

and should not reasonably have been 

aware, of facts indicating a contrary 

purpose. 

The CFTC is also proposing to remove 

reference to physical factors or 

regulatory requirements being ‘‘outside 

the control of the parties.’’ This phrase 

was taken from commenter letters 19 but 

has also apparently created problems 

during contract negotiations, as 

counterparties often disagree about the 

degree of control they have over factors 

influencing their demand for or supply 

of the nonfinancial commodity.20 By 

removing this language, the CFTC 

intends to clarify that whether the 

parties have some influence over factors 

affecting their demand for or supply of 

the nonfinancial commodity (e.g., the 

scheduling of plant maintenance, plans 

for business expansion) would not be 

inconsistent with the seventh element of 

the CFTC’s interpretation, provided that 

the embedded volumetric optionality is 

included in the contract at initiation 

primarily to address potential variability 

in a party’s supply of or demand for the 

nonfinancial commodity. 

The CFTC is also proposing to clarify 

that the phrase ‘‘physical factors’’ 

should be construed broadly to include 

any fact or circumstance that could 

reasonably influence supply of or 

demand for the nonfinancial commodity 

under the contract. Such facts and 

circumstances could include not only 

environmental factors, such as weather 

or location, but relevant ‘‘operational 

considerations’’ (e.g., the availability of 

reliable transportation or technology) 

and broader social forces, such as 

changes in demographics or 

geopolitics.21 Concerns that are 


rmajette on DSK2VPTVN1PROD with PROPOSALS
69076 Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 

considered ‘‘physical factors’’ within the scope of 

the seventh element. See 77 FR 48239 n.345. 

22See Letter from the Office of the General 

Counsel, Federal Energy Regulatory Commission 

(Oct. 12, 2012) at 4. The CFTC confirms that, as 

stated in the Products Release, the deliverable 

quantities allowable under embedded volumetric 

optionality may be justified by a combination of 

regulatory requirements and physical factors, such 

that the quantity provided for by the embedded 

volumetric optionality may reasonably exceed 

quantities required by regulation. See 77 FR 48238 

n.340. 

23See Letter from the National Rural Electric 

Cooperative Association, the American Public 

Power Association, the Large Public Power 

Association, and the Transmission Access Policy 

Study Group (Oct. 12, 2012) at 9. 

24The CFTC clarifies that its interpretations 

regarding full requirements and output contracts, as 

provided in the Products Release, would be 

unaffected by the discussion herein. See 77 FR 

48239–40. Similarly, the CFTC reiterates that, 

depending on the relevant facts and circumstances, 

capacity contracts, transmission (or transportation) 

service agreements, tolling agreements, and peaking 

supply contracts, as discussed in the Products 

Release, may qualify as forward contracts with 

embedded volumetric optionality provided they 

meet the elements of the CFTC’s proposed 

interpretation. See 77 FR 48240. 25See 77 FR 25320 (April 27, 2012). 

primarily about price risk (e.g., 

expectations that the cash market price 

will increase or decrease), however, 

would not satisfy the seventh element 

absent an applicable regulatory 

requirement to obtain or provide the 

lowest price (e.g., the buyer is an energy 

company regulated on a cost-of-service 

basis).22

The CFTC understands that in certain 

retail electric market demand-response 

programs, electric utilities have the right 

to interrupt or curtail service to a 

customer to support system reliability.23

The CFTC is proposing to clarify that, 

given that a key function of an 

electricity system operator is to ensure 

grid reliability, demand response 

agreements, even if not specifically 

mandated by a system operator, may be 

properly characterized as the product of 

regulatory requirements within the 

meaning of the seventh element.24

III. Request for Comment 

The CFTC believes that it would 

benefit from public comment about its 

proposed interpretation, and therefore 

requests public comment on all aspects 

of its proposed interpretation regarding 

forwards with embedded volumetric 

optionality, and on the following 

questions: 

1. Market participants have expressed 

concerns about whether various types of 

volumetric optionality fit within the 

CFTC’s interpretation. The CFTC 

recognizes that, since the interpretation 

is not intended to provide relief for all 

forms of embedded volumetric 

optionality, there are likely to remain 

concerns within the industry about the 

treatment of embedded volumetric 

optionality within forward contracts. 

The CFTC notes that, in April, 2012, 

the CFTC adopted an Interim Final Rule 

for Commodity Options (the ‘‘IFR’’).25

Even if a contract with volumetric 

optionality does not fit within the seven 

elements of the interpretation, the CFTC 

believes there is widespread agreement 

that contracts that fail one or more of 

the seven elements of the CFTC’s 

interpretation would fall within the 

exemption from most swaps regulation 

provided by the IFR. Therefore, it 

appears that the IFR provides a clear 

and well-understood mechanism 

through which contracts with 

volumetric optionality can be exempted 

that avoids many of the difficulties of 

determining whether a particular 

contract with volumetric optionality 

would satisfy the seven elements of the 

CFTC’s interpretation. 

The CFTC invites comment on 

whether the IFR’s approach to defining 

the universe of swaps subject to its 

exemption may provide a clearer and 

easier mechanism for providing relief 

from swaps requirements than the 

CFTC’s interpretation of forwards with 

embedded volumetric optionality and 

whether the IFR currently provides 

sufficient relief for such contracts. 

2. Market participants have argued 

that the lack of clarity around the 

seventh element of the CFTC’s 

interpretation has led to costs to endusers. Conceivably, since contracts that 

fail one or more of the seven elements 

would be regulated as exempt 

commodity trade options under the IFR, 

these costs are attributable to complying 

with the IFR. The CFTC invites 

comment on whether or not this is the 

case, and invites the submission of data 

quantifying those costs. 

3. What factors should the CFTC 

consider in determining whether the 

proposed modifications and 

clarifications to the CFTC’s 

interpretation are appropriate in view of 

CFTC precedent regarding the 

interpretation of the CEA’s forward 

contract exclusion? Do the proposed 

changes provide sufficient clarity on 

how contracts with embedded 

volumetric optionality may satisfy all 

seven elements of the interpretation, 

particularly the first and second 

elements? Are there reasons why trying 

to provide further relief through the 

swap definition’s forward contract 

exclusion would not be in the public 

interest? 

By the Securities and Exchange 

Commission. 

Brent J. Fields, 

Secretary. 

Dated: November 13, 2014. 

Issued in Washington, DC, on November 

13, 2014, by the Commodity Futures Trading 

Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Commodity Futures Trading 

Commission (CFTC) Appendices to 

Forward Contracts With Embedded 

Volumetric Optionality—Commission 

Voting Summary, Chairman’s 

Statement, and Commissioners’ 

Statements 

Appendix 1—Commodity Futures 

Trading Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Wetjen, Bowen, and 

Giancarlo voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of CFTC 

Chairman Timothy G. Massad 

I support the Staff’s proposed 

interpretation regarding forward contracts 

that have what is known as embedded 

volumetric optionality—generally speaking, 

contracts to buy or sell a nonfinancial 

commodity for deferred delivery that provide 

for variations in delivery amount. 

One of my priorities has been to fine-tune 

our rules to make sure they work as intended 

and do not impose undue burdens or 

unintended consequences, particularly for 

the nonfinancial commercial businesses that 

use these markets to hedge commercial risks. 

We must make sure these businesses— 

whether they are manufacturers, farmers, 

ranchers or other companies—can continue 

to use these markets efficiently and 

effectively. 

This proposal is part of that effort. In 

certain situations, commercial parties are 

unable to predict at the time a contract is 

entered into the exact quantities of the 

commodity that they may need or be able to 

supply, and the embedded volumetric 

optionality offers them the flexibility to vary 

the quantities delivered accordingly. The 

CFTC put out an interpretation, consisting of 

seven factors, to provide clarity as to when 

such contracts would fall within the forward 

contract exclusion from the swap definition, 

but some market participants have felt this 

interpretation, in particular the seventh 

factor, was hard to apply. In some cases, the 

two parties would reach different 

conclusions about the same contract. 

Today we are proposing clarifications to 

the interpretation that I believe will alleviate 

this ambiguity and allow contracts with 

volumetric optionality that truly are intended 

to address uncertainty with respect to the 

parties’ future production capacity or 

delivery needs, and not for speculative 

purposes or as a means to obtain one-way 

price protection, to fall within the exclusion. 


rmajette on DSK2VPTVN1PROD with PROPOSALS
Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 69077 

26 7 U.S.C. 1a(47). 

27 7 U.S.C. 9(c)(1) (‘‘It shall be unlawful for any 

person, directly or indirectly, to use or employ, or 

attempt to use or employ, in connection with . . . 

a contract of sale of any commodity in interstate 

commerce . . . any manipulative or deceptive 

device or contrivance, in contravention of such 

rules and regulations as the Commission shall 

promulgate . . .’’.). See also 17 CFR Part 180. 

28 7 U.S.C. 9(c)(3) (‘‘[I]t shall be unlawful for any 

person, directly or indirectly, to manipulate or 

attempt to manipulate the price . . . of any 

commodity in interstate commerce. . .’’). 

29 17 CFR 18.05(b) (maintenance of books and 

records concerning positions and transactions in 

the cash commodity); 17 CFR 1.31 (pursuant to 

§ 1.31(2), the authority to request information 

required to be kept in accordance with the Act or 

Commission regulations); 17 CFR 1.35 (pursuant to 

§ 1.35(3), the authority to request from a futures 

commission merchant, retail foreign exchange 

dealer, introducing broker or member of a 

designated contract market or swap execution 

facility records required to be kept by § 1.35 in 

accordance with the requirements of § 1.31); 17 CFR 

23.203 (pursuant to § 23.203(a), the authority to 

request and receive within 72 hours any records 

required to be kept by a swap dealer or major swap 

participant by the Act and by Commission 

regulations and pursuant to § 23.203(2), the 

authority to request records of any swap or related 

cash or forward transaction); 17 CFR 23.606 

(pursuant to § 23.606(c), the authority to request 

information that a swap dealer or major swap 

participant is required to maintain under 

§ 23.606(a)(1)); 17 CFR 45.2 (pursuant to § 45.2(h), 

the authority to request from swap execution 

facilities, designated contract markets, derivatives 

clearing organizations, swap dealers, and major 

swap participants records required to be kept 

pursuant to § 45.2.); 17 CFR 46.2 (the authority, 

pursuant to § 46.2(e), to request records relating to 

pre-enactment and transition swaps in existence on 

or after April 25, 2011). 

30Letter from The Edison Electric Institute 

(‘‘EEI’’) and the Electric Power Supply Association 

(‘‘EPSA’’) (April 17, 2014) (‘‘EEI/EPSA Letter’’) at 3 

(‘‘The exercise or non-exercise of volumetric 

optionality under a forward energy contract 

depends on a number of factors, including but not 

limited to, any or all of the following: (1) The level 

of demand as affected by weather or market 

conditions; (2) the amount of unexercised volume 

remaining under the contract; (3) the time of the 

change in the level of demand relative to delivery 

scheduling capabilities, (4) anticipated future 

weather conditions, (5) the delivery location under 

the contract relative to the demand location; (6) the 

price and availability of transportation capacity (e.g. 

pipeline capacity) to move natural gas; (7) the price 

of alternative sources of supply; (8) the availability 

of natural gas or electricity in the spot market; and/ 

or (9) the remaining inventory of the commodity in 

storage.’’). 

31Letter from the American Gas Association 

(April 17, 2014) (‘‘AGA Letter’’) at 10 (citing 

‘‘widespread confusion as to whether 

counterparties must demonstrate forward contract 

status as of the time of entering into an agreement, 

or as of the time of exercise or non-exercise of 

delivery rights under the agreement.’’). 

32AGA Letter at 2; EEI/EPSA letter at 3. 

33NFP Electric Associations Letter at 3. 

34EEI/EPSA letter at 3. 

Appendix 3—Statement of CFTC 

Commissioner Mark P. Wetjen 

This proposal further clarifying the 

definition of forward contracts with 

embedded volumetric optionality, or EVO, is 

intended to provide commercial firms the 

regulatory clarity they have sought since the 

original release of the seven-part test in 

August 2012. 

The definition of a swap in the Commodity 

Exchange Act includes commodity options, 

but excludes from that definition forward 

contracts.26 There was a policy reason for 

this, and at its root was a desire to ensure 

that Dodd-Frank captured many swaps, and 

swap-like contracts, that were structured to 

be similar to options, while also ensuring 

that a new regulatory regime was not 

inadvertently and inappropriately extended 

into certain physical markets. 

The broad definitional language in 

question was designed to ensure that 

financial—as opposed to physical—contracts 

could not be structured or re-characterized to 

avoid the new market structure. While the 

swap definition does not expressly exclude 

options on energy and agricultural 

commodities, it does exclude both futures 

and forwards. I am confident Congress did 

not intend to pull contracts that historically 

have been treated as forwards into the new 

swap regime solely because of optionality in 

the amount of the physical commodity 

delivered under the contract. 

As a policy matter, Congress surely 

recognized that the swap definition had to 

reflect a long-held Commission belief that 

contracts that are physically settled, and 

where delivery is required, do not pose the 

same systemic threats to the financial system 

as contracts used for speculative purposes. 

Moreover, Congress expanded the 

Commission’s fraud 27 and anti-manipulation 

authority 28 over markets where forward 

contracts are traded, and left intact the 

Commission’s surveillance authority to issue 

special calls to market participants for all 

positions and transactions related to a 

commodity.29

As mentioned, in resolving to adopt the 

appropriate regulatory treatment of forward 

contracts with EVO, the Commission also 

must weigh the operational and compliance 

consequences of that treatment. Indeed, the 

Commission should bring a heightened 

sensitivity to these considerations in the 

context of the power sector because 

affordable electricity and heat are such 

fundamental needs of modern life. 

The Commission’s 2012 interpretation, 

while intended to be helpful, contained 

certain ambiguities in the seven-part test that 

created confusion among commercial endusers. 

Last spring, the Commission learned at a 

public roundtable that some market 

participants may have withdrawn from the 

market due to those ambiguities, resulting in 

inferior execution for commercial firms. It is 

difficult to measure the exact impact of this 

phenomenon, but apparently it has not been 

a positive one for consumers of electricity 

and gas. 

A. Ambiguity in the Seven-Part Test 

In discussing the seven-part test, 

commentators zeroed in on two primary 

issues. First, many of the roundtable 

participants noted that the exercise or nonexercise of volumetric optionality depends 

on a number of factors,30 some of which will 

be outside of the control of the parties, and 

some that will not. 

Many also noted that parties could 

reasonably disagree on whether, and the 

degree to which, a factor is outside of the 

control of the parties. For example, having 

choice among more than one source of 

supply, or selecting from those choices the 

lowest-priced contract, to some commercial 

firms caused the contract to fail the seventh 

prong. 

This ambiguity contributed to a second 

issue—market participants stated that they 

often do not know the exact reasons that 

optionality will be exercised until the time of 

exercise. In other words, parties are uncertain 

how to characterize contracts at the time of 

execution, and how intent at the time of 

exercise or non-exercise might affect that 

analysis.31

The seventh factor’s ambiguity has caused 

a host of problems. For instance, parties have 

been asked to provide vague and possibly 

unenforceable representations in 

agreements.32 Parties also often disagree 

about the proper categorization of a 

transaction, resulting in them ‘‘agreeing to 

disagree’’ and considering the same 

transaction to be, at the same time, a swap, 

trade option, or a forward with EVO.33 This 

has had the unintended consequence of 

distorting transaction data reported to the 

Commission.34

The bottom line is that such uncertainty in 

the seven-part test increased transaction costs 

for commercial firms and limited their access 

to an effective risk-management tool. 

B. Proposed Clarifications 

This proposal appropriately modifies and 

clarifies the interpretation of the seventh 

prong. First, it clarifies that concluding 

whether the seventh prong is met should be 

determined by looking to the intent of the 

parties at the outset of contract initiation. 

Second, the new proposal also deletes 

language referring to physical or regulatory 

factors being ‘‘outside of the control of the 

parties.’’ Deleting this ambiguous language 

helps clarify that parties having some 

influence over factors affecting their demand 

for a nonfinancial commodity will not per se 

cause a contract to fail the seventh prong. 

In that vein, the proposal also notes that 

parties may take a variety of factors into 

consideration when determining whether to 

exercise volumetric optionality, so long as 

the intended purpose was to address physical 

factors or regulatory requirements 

influencing the demand for, or supply of, the 

commodity. 

Prongs one through six of the test are also 

appropriately crafted to ensure that the EVO 

does not undermine the forward contract’s 

overall purpose. Prongs two and three help 

achieve those purposes by requiring the 

predominant factor to be actual delivery, and 

prohibiting the embedded optionality from 

being severed and marketed separately from 

the overall agreement. 

Prongs four and five also help deter the 

potential for abuse of these contracts by 

requiring that the seller under the contract 

intends to deliver, and the buyer intends to 

receive, the underlying commodity. 

This proposal should go a long way 

towards providing commercial firms 


rmajette on DSK2VPTVN1PROD with PROPOSALS
69078 Federal Register / Vol. 79, No. 224 / Thursday, November 20, 2014 / Proposed Rules 

adequate guidance, but I look forward to 

comments on whether it is adequate enough. 

Appendix 4—Concurring Statement of 

CFTC Commissioner Sharon Y. Bowen 

This is a proposal that, I am concerned, 

will neither provide the clarity industry is 

seeking regarding the treatment of embedded 

volumetric options nor the safeguards that 

Congress intended when it passed the DoddFrank Wall Street Reform and Customer 

Protection Act. 

I do not oppose the Commission’s trying to 

better tailor our regulations to address 

concerns of end-users. In fact, I commend the 

Chairman and my fellow Commissioners for 

trying to address the issues that have arisen 

from our existing guidance and rules on 

embedded volumetric options. After many 

meetings with stakeholders and much 

analysis of this subject, I am convinced that 

the Commission should address concerns 

that industry has raised regarding the 

treatment of embedded volumetric options. 

However, the proposed interpretation may 

not resolve the issues industry has raised. 

Options, even physical options, have never 

been interpreted by the Commission to be 

forward contracts. They lack the central 

characteristic that is critical to being a 

forward contract under the Commodity 

Exchange Act: A binding obligation to deliver 

at some time in the future. The history on 

this is clear, if there is no binding obligation 

to deliver, there is no forward contract. 

The seventh factor was intended, 

essentially, as a ‘‘safe-harbor’’ provision. 

Notwithstanding the fact there is no 

obligation to make or take delivery for the 

optional portion of the specified commodity, 

the seventh factor was designed to allow a 

party’s transaction to receive the forward 

exclusion if that party can demonstrate that 

it determined the specified, optional amount 

was necessary based upon commercial and 

physical factors, and exercised the option 

based upon those factors. In other words, this 

seventh factor was designed to allow 

embedded volumetric options to receive the 

forward contract exclusion treatment where 

their exercise was driven largely by external 

commercial and physical factors central to 

the party’s commercial business, but largely 

beyond the control of the party. Through its 

conduct then, the party was demonstrating 

its intent to be ‘‘bound’’ to exercise the 

option if its estimate, based on the factors it 

used, proved to be accurate. 

The Commission was trying to distinguish 

such a situation from a situation where the 

party enters into the embedded volumetric 

option intending to exercise the volumetric 

option based upon whether, at the time of 

exercise, it still makes economic sense to use 

the option. In other words, it was trying to 

distinguish a situation where the motivation 

for exercising the option was primarily or 

substantially based on price. In the latter 

case, the embedded volumetric option is hard 

to distinguish, in usage, from any other 

commodity option. There is no 

demonstration in the party’s course of 

conduct that it intended to be ‘‘bound’’ to 

exercise the option at all. 

While this test is far from perfect, and I can 

see the difficulty industry would have in 

administering it, the Commission was clearly 

trying to find a rationale for allowing some 

volumetric optionality that was consistent 

with the Commission’s historic treatment of 

forward contracts, while avoiding completely 

erasing the line between options and futures 

on the one hand, and cash and forward 

contracts on the other. 

This current proposal, however, in 

possibly broadening the universe of options 

that would fit within the seventh factor, 

seems to depart from that rationale, and in 

doing so, loses that vital element of 

demonstrating the parties intended to be 

‘‘bound’’ in some sense to exercise the option 

and consequently that the option was similar, 

in usage, to a forward contract. Without that, 

it is not clear to me how such an option can 

be considered consistent with a forward 

contract. If it cannot be considered at least 

similar to a forward contract, I am not sure 

how a party would determine that 

embedding such an option in a forward 

contract would not undermine its nature as 

a forward contract and thus fail the first 

factor of the seven-factor test. 

There is nothing in the Commodity 

Exchange Act or Dodd-Frank that 

contemplates options can be deemed forward 

contracts simply by being associated with a 

forward contract. In fact, the opposite seems 

true: Congress specifically determined that 

commodity options are swaps and removed 

the Commission’s ability to provide 

exemptions from the definition of swap. 

Interestingly though, Congress did 

maintain the Commission’s authority to 

determine how swaps that are commodity 

options should be regulated since Congress 

did not repeal the Commission’s plenary 

authority over options, including options that 

are swaps. It was that plenary authority that 

the Commission utilized to exempt trade 

options from most of the regulations 

applicable to swaps in April 2012. It is that 

authority that the Commission should use 

here to address embedded volumetric 

options. 

By seeking to broaden an exclusion for 

volumetric options embedded in forward 

contracts, the proposed interpretation does 

try to achieve a goal that industry apparently 

wants—they would like these options to be 

outside the Commission’s jurisdiction rather 

than just exempted from regulation. 

However, history has shown that as the circle 

of exclusion widens for industry, too often 

the circle of protection narrows for investors 

and consumers. 

In 1993, one Commissioner cast the lone 

dissenting vote against exempting over-thecounter energy derivatives from Commission 

regulation. She argued that exempting energy 

derivatives from regulation would set a 

dangerous precedent and would leave the 

public unprotected. Today’s proposal seems 

to go farther. It excludes embedded 

volumetric options from the Commission’s 

authority. Whereas with an exemption, there 

is the ability to later tailor it to fit the precise 

needs of the market and the public, there is 

no turning back from an exclusion. 

Congress said, quite clearly, that 

commodity options are swaps, not forwards. 

Embedded volumetric options should be 

exempted as options, not excluded as 

forwards. I know many in industry have 

spoken for the need for further clarity 

regarding the regulation of embedded 

volumetric options. I don’t know what clarity 

is achieved by trying to call something what 

it is not. If it looks like an option, is used like 

an option, and works like an option, it is 

most likely, an option. 

I think the objective of providing for clear 

regulatory treatment of embedded volumetric 

options will be far easier to implement, and 

far more complete, if done through fixing the 

trade option exemption. Regardless, this 

proposal is the vehicle before the 

Commission at present. I want us to get this 

interpretation right, and therefore support 

getting public comment on these changes. I 

do not believe we should contemplate such 

a significant change to our jurisdiction 

without receiving the public’s views on it 

first. I invite all interested stakeholders to 

respond to this proposal and look forward to 

reviewing their comments. 

[FR Doc. 2014–27285 Filed 11–19–14; 8:45 am] 

BILLING CODE 6351–01–P; 8011–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 165 

[Docket No. USCG–2014–0246] 

RIN 1625–AA87 

Security Zone, John Joseph Moakley 

United States Courthouse, Boston, MA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The United States Coast 

Guard proposes to establish a 

permanent security zone within Sector 

Boston’s Captain of the Port (COTP) 

Zone on the waters in the vicinity of 

John Joseph Moakley United States 

Courthouse, Boston, MA. Enforcement 

of this permanent security zone during 

high profile court proceedings at the 

Moakley Courthouse is necessary to 

protect people, property, and the port of 

Boston from subversive acts. 

DATES: Comments and related material 

must be received by the Coast Guard on 

or before December 22, 2014. 

Requests for public meetings must be 

received by the Coast Guard on or before 

December 1, 2014. 

ADDRESSES: You may submit comments 

identified by docket number USCG– 

2014–0246 using any one of the 

following methods: 

(1) Federal eRulemaking Portal: 

http://www.regulations.gov. 

(2) Fax: 202–493–2251. 

(3) Mail or Delivery: Docket 

Management Facility (M–30), U.S. 

Department of Transportation, West 


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