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[Federal Register Volume 76, Number 23 (Thursday, February 3, 2011)]
[Proposed Rules]
[Pages 6095-6110]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1685]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3, 32, 33, and 35

Commodity Options and Agricultural Swaps

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is charged with proposing rules to implement new statutory 
provisions enacted by Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act 
provides that swaps in an agricultural commodity (as defined by the 
Commission) are prohibited unless entered into pursuant to a rule, 
regulation or order of the Commission adopted pursuant to Commodity 
Exchange Act (``CEA'' or ``Act''). The Dodd-Frank Act also includes 
options (other than an option on a futures contract) in its definition 
of swaps. Broadly speaking, the rules proposed herein would implement 
regulations whereby swaps in agricultural commodities and all commodity 
options (including options on both agricultural and non-agricultural 
commodities), other than options on futures, may transact subject to 
the same rules as all other swaps. The proposed rules for swaps in an 
agricultural commodity would repeal and replace the Commission's 
regulations concerning the exemption of swap agreements. Because the 
Dodd-Frank Act defines commodity options (other than options on 
futures) as swaps, the proposed rules for options would substantially 
amend the Commission's regulations regarding commodity option 
transactions. Also, current regulations on domestic exchange-traded 
commodity option transactions applies not only to exchange-traded 
options on futures (which are excluded from the Dodd-Frank definition 
of a swap), but also to exchange-traded options on physical commodities 
(which are within the Dodd-Frank swap definition). Therefore, the 
proposed rules would remove references to options on physical 
commodities from the Commission's regulations for exchange-traded 
options on futures.

DATES: Written comments must be received on or before April 4, 2011.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD21, 
by any of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
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 Commission 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 Sec.  145.9 of the Commission's Regulations.\1\
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    \1\ 17 CFR 145.9. Unless otherwise indicated, the rules and 
regulations referenced in this notice are found in chapter 1 of 
title 17 of the Code of Federal Regulations; 17 CFR Chapter 1 et 
seq.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special 
Counsel, (202) 418-5041, dheitman@cftc.gov, or Ryne Miller, Attorney 
Advisor, (202) 418-5921, rmiller@cftc.gov, Division of Market 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act 
\3\ amended the CEA \4\ to establish a comprehensive new regulatory 
framework for swaps and security-based swaps. The legislation was 
enacted to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to, among others, all registered entities and intermediaries 
subject to the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to 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.
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    Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an 
agricultural commodity (as defined by the Commission) \5\ are 
prohibited unless entered into pursuant to a rule, regulation or order 
of the Commission adopted pursuant to CEA section 4(c).

[[Page 6096]]

Further, section 733 of the Dodd-Frank Act, new CEA section 5h(b)(2), 
provides that a swap execution facility (``SEF'') may not list for 
trading or confirm the execution of any swap in an agricultural 
commodity (as defined by the Commission) except pursuant to a rule or 
regulation of the Commission allowing the swap under such terms and 
conditions as the Commission shall prescribe.
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    \5\ As discussed below, in accordance with the mandate of the 
Dodd-Frank Act, the Commission has recently proposed a definition of 
the term ``agricultural commodity.'' See 75 FR 65586, Oct. 26, 2010.
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    In addition to the provisions on swaps in an agricultural 
commodity, the Dodd-Frank Act definition of ``swap'' includes options 
(other than options on futures). Section 721 of the Dodd-Frank Act adds 
new section 1a(47) to the CEA, defining ``swap'' to include not only 
``any agreement, contract, or transaction commonly known as,'' among 
other things, ``an agricultural swap'' or ``a commodity swap,'' but 
also ``[an] option of any kind that is for the purchase or sale, or 
based on the value, of * * * commodities * * *.'' \6\ As a result of 
the Dodd-Frank changes, the Commission is issuing this notice 
proposing: (1) To withdraw and replace current part 35; \7\ (2) to 
substantially amend current part 32; \8\ (3) to withdraw rule 3.13, 
which will be rendered moot by the withdrawal of rule 32.13; and (4) to 
amend part 33 \9\ to remove references to options on physical 
commodities. As proposed, new part 35 and revised parts 32 and 33 will 
provide the regulatory authority under which market participants may 
enter into, respectively, swaps in an agricultural commodity 
(``agricultural swaps'') \10\ and commodity options.\11\
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    \6\ See new CEA section 1a(47), as added by section 721 of the 
Dodd-Frank Act. The Dodd-Frank swap definition excludes exchange-
traded options on futures, but not exchange-traded options on 
physical commodities (see new CEA section 1a(47)(B)(i)). 
Accordingly, the Commission is amending part 33 of its regulations, 
``Regulation of Domestic Exchange-Traded Commodity Option 
Transactions,'' to the extent that Part 33 applies to exchange-
traded options on physical commodities, which are swaps under the 
Dodd-Frank definition. The rules proposed herein would remove any 
reference in part 33 to ``options on physicals,'' and such 
transactions would become subject to the regulations in revised part 
32, discussed below. Other options excluded from the 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 new CEA section 
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 new CEA section 
1a(47)(B)(iv)).
    \7\ 17 CFR Part 35.
    \8\ 17 CFR Part 32.
    \9\ 17 CFR Part 33.
    \10\ When this notice refers to ``agricultural swaps,'' it is 
referring to swaps in an agricultural commodity, as identified in 
section 723(c)(3) of the Dodd-Frank Act.
    \11\ ``Commodity option'' and ``commodity option transaction'' 
are defined in 17 CFR 1.3(hh). When this notice refers generally to 
``commodity options'' or ``options,'' the terms will refer to all 
commodity options transactions other than those options on futures 
that are excluded from the Dodd-Frank definition of swap (see 
footnote 6, above).
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    To that end, this notice includes a background discussion of the 
statutory and regulatory framework governing agricultural swaps and 
commodity options. The notice also provides an overview and summary of 
the comments received on the Commission's Advanced Notice of Proposed 
Rulemaking regarding the agricultural swaps provisions in the Dodd-
Frank Act.\12\ Finally, the notice includes an explanation of the 
rulemakings proposed herein, a discussion of CEA section 4(c) as the 
authority for the agricultural swaps aspect of this rulemaking, a 
request for comment on the proposed rulemaking, and a section 
addressing related matters.
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    \12\ See Agricultural Swaps, 75 FR 59666, Sept. 28, 2010.
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II. Background

A. Agricultural Swaps

i. Pre Dodd-Frank
    Since 2000, bilateral swaps \13\ between certain sophisticated 
counterparties have been generally exempted from the Commission's 
jurisdiction pursuant to current CEA section 2(g),\14\ which was added 
to the CEA by the Commodity Futures Modernization Act of 2000 
(``CFMA'').\15\ However, current section 2(g) specifically excludes an 
``agreement, contract, or transaction'' in an ``agricultural 
commodity'' from the CFMA swaps exemption.\16\
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    \13\ Prior to the Dodd-Frank Act, the Commission had defined a 
``swap'' as follows: ``A swap is a privately negotiated exchange of 
one asset or cash flow for another asset or cash flow. In a 
commodity swap [including an agricultural swap], at least one of the 
assets or cash flows is related to the price of one or more 
commodities.'' (See 72 FR 66099, note 7, Nov. 27, 2007). As 
discussed above, see new CEA section 1a(47) for the statutory 
definition of a ``swap,'' as added to the CEA by section 721 of the 
Dodd-Frank Act.
    \14\ Current section 2(g) provides:
    No provision of this Act (other than section 5a (to the extent 
provided in section 5a(g)), 5b, 5d, or 12(e)(2)) shall apply to or 
govern any agreement, contract, or transaction in a commodity other 
than an agricultural commodity if the agreement, contract, or 
transaction is--
    (1) Entered into only between persons that are eligible contract 
participants at the time they enter into the agreement, contract, or 
transaction;
    (2) Subject to individual negotiation by the parties; and
    (3) Not executed or traded on a trading facility.
    CEA section 2(g).
    \15\ Current CEA section 2(g) was added to the CEA as section 
105(b) of the CFMA, enacted as Appendix E to Public Law 106-554.
    \16\ Notably, current CEA section 2(g) is not the only statutory 
provision added by the CFMA that excludes or exempts bilateral swaps 
between eligible contract participants from the Commission's 
jurisdiction. Current CEA section 2(d)(1) excludes any such 
bilateral ``agreement, contract, or transaction'' in excluded 
commodities from Commission jurisdiction, while CEA section 2(h)(1) 
creates a similar exemption for a ``contract, agreement or 
transaction'' in exempt commodities.
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    While the term ``agricultural commodity'' is not specifically 
defined in the Act,\17\ it is used in the Act in conjunction with the 
definition of the term ``exempt commodity,'' which is defined as 
neither an ``agricultural commodity'' nor an ``excluded commodity.'' 
\18\ The effect of current CEA section 2(g) was that swaps involving 
exempt and excluded commodities were allowed to transact largely 
outside of the Commission's jurisdiction or oversight. And while the 
Dodd-Frank Act largely rewrites the world of law and regulation 
applicable to swaps in non-agricultural commodities,\19\ swaps 
involving agricultural commodities,\20\ including both the enumerated 
agricultural commodities and other non-enumerated agricultural 
commodities,\21\ remain subject to the Commission's pre-CFMA swaps 
regulations as set forth in part 35.\22\
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    \17\ Note that the Commission has proposed for comment a formal 
definition of agricultural commodity. See Agricultural Commodity 
Definition, 75 FR 65586, Oct. 26, 2010.
    \18\ ``The term `exempt commodity' means a commodity that is not 
an excluded commodity or an agricultural commodity.'' Current CEA 
section 1a(14). An ``excluded commodity'' is defined in current CEA 
section 1a(13) to include financial commodities such as interest 
rates, currencies, economic indexes, and other similar items.
    \19\ See Dodd-Frank non-agricultural swaps discussion, below.
    \20\ See 75 FR 59666, at 59667, Sept. 28, 2010, for an 
explanation of the legislative history discussing ``agricultural 
commodity'' as used in CEA section 2(g).
    \21\ ``Enumerated agricultural commodities'' typically refers to 
the list of commodities specifically enumerated in the CEA 
definition of ``commodity'' at current CEA Section 1a(4) (renumbered 
as section 1a(9) under Dodd-Frank): Wheat, cotton, rice, corn, oats, 
barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, 
Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils 
(including lard, tallow, cottonseed oil, peanut oil, soybean oil, 
and all other fats and oils), cottonseed meal, cottonseed, peanuts, 
soybeans, soybean meal, livestock, livestock products, and frozen 
concentrated orange juice (but not onions).
    \22\ 17 CFR Part 35 remains in effect for agricultural swaps 
because it was originally adopted under the Commission's CEA section 
4(c) exemptive authority, and section 723(c)(3)(B) of the Dodd-Frank 
Act grandfathers existing 4(c) exemptions in the context of 
agricultural swaps.
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    Part 35 provides a broad exemption for certain swap agreements. As 
noted, part 35 originally applied to swaps in all

[[Page 6097]]

commodities.\23\ After the CFMA amendments to the CEA, which 
statutorily exempted swaps on ``exempt'' and ``excluded'' commodities 
from virtually all of the Commission's jurisdiction, part 35 remained 
relevant only for agricultural swaps. With the exception of three 
outstanding exemptive orders related to cleared agricultural basis and 
calendar swaps \24\ (which exempt certain swaps transactions from part 
35's non-fungibility and counterparty creditworthiness requirements), 
part 35 is the sole existing authority under which market participants 
may transact agricultural swaps that are not options.\25\
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    \23\ Part 35 provides eligible swap participants (as defined in 
Sec.  35.1(b)(2)) with a general exemption from the CEA for a swap 
that is not part of a fungible class of agreements that are 
standardized as to their material economic terms, where the 
creditworthiness of each counterparty is a material consideration in 
entering into or determining the terms of the swap, and the swap is 
not entered into and traded on or through a multilateral transaction 
execution facility. See Sec.  35.2.
    \24\ Part 35, at Sec.  35.2(d), also provides that ``any person 
may apply to the Commission for exemption from any of the provisions 
of the Act (except 2(a)(1)(B) [liability of principal for act of 
agent]) for other arrangements or facilities, on such terms and 
conditions as the Commission deems appropriate, including but not 
limited to, the applicability of other regulatory regimes.'' See 17 
CFR 35.2(d). The Commission has granted three such exemptions, which 
have in each instance been styled as exemptive orders pursuant to 
CEA section 4(c). See,
    Order (1) Pursuant to Section 4(c) of the Commodity Exchange Act 
(a) Permitting Eligible Swap Participants To Submit for Clearing and 
ICE Clear U.S., Inc. and Futures Commission Merchants To Clear 
Certain Over-The-Counter Agricultural Swaps and (b) Determining 
Certain Floor Brokers and Traders To Be Eligible Swap Participants; 
and (2) Pursuant to Section 4d of the Commodity Exchange Act, 
Permitting Certain Customer Positions in the Foregoing Swaps and 
Associated Property To Be Commingled With Other Property Held in 
Segregated Accounts, 73 FR 77015, Dec. 18, 2008;
    Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act, Permitting the Chicago Mercantile Exchange to Clear Certain 
Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d 
of the Commodity Exchange Act, Permitting Customer Positions in Such 
Cleared-Only Contracts and Associated Funds To Be Commingled With 
Other Positions and Funds Held in Customer Segregated Accounts, 74 
FR 12316, Mar. 24, 2009; and
    Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act, Permitting the Kansas City Board of Trade Clearing Corporation 
To Clear Over-the-Counter Wheat Calendar Swaps and (2) Pursuant to 
Section 4d of the Commodity Exchange Act, Permitting Customer 
Positions in Such Cleared-Only Swaps and Associated Funds To Be 
Commingled With Other Positions and Funds Held in Customer 
Segregated Accounts, 75 FR 34983, June 21, 2010.
    \25\ Options on agricultural commodities are reviewed in detail 
in the options discussion of this notice.
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ii. Dodd-Frank Swaps Provisions
a. Non-Agricultural Swaps
    Under the CEA, as amended by the Dodd-Frank Act, only eligible 
contract participants (``ECPs'') \26\ may enter into a swap, unless 
such swap is entered into on a designated contract market 
(``DCM''),\27\ in which case any person may enter into the swap.\28\
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    \26\ ``Eligible contract participant'' is defined in current CEA 
section 1a(12). Generally speaking, an eligible contract participant 
is considered to be a sophisticated investor.
    \27\ A designated contract market is a board of trade designated 
as a contract market under CEA section 5.
    \28\ See new CEA section 2(e) as added by section 723(a)(2) of 
the Dodd-Frank Act.
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    New CEA section 2(h), as added by section 723(a)(3) of the Dodd-
Frank Act, establishes a clearing requirement for swaps. Under that 
subsection, the Commission would determine, based on factors listed in 
the statute, whether a swap, or a group, category, type, or class of 
swaps, should be required to be cleared. A swap that is required to be 
cleared must be executed on a DCM or a SEF,\29\ if a DCM or SEF makes 
the swap available for trading. Swaps that are not required to be 
cleared may be executed bilaterally. Notwithstanding the above, a swap 
entered into by a commercial end user \30\ is not subject to the 
mandatory clearing requirement; however an end user may opt to submit 
the swap for clearing.
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    \29\ The requirements for SEFs are set forth in new CEA section 
5h.
    \30\ Generally, a commercial end user is described in new CEA 
section 2(h)(7) as a non-financial entity that is using swaps to 
hedge or mitigate commercial risk and that notifies the Commission 
as to how it generally meets its financial obligations associated 
with entering into non-cleared swaps.
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    Section 731 of the Dodd-Frank Act adds a new section 4s to the CEA 
that provides for the registration and regulation of swap dealers and 
major swap participants.\31\ The new requirements for swap dealers and 
major swap participants include, in part, capital and margin 
requirements, business conduct standards, and reporting, recordkeeping, 
and documentation requirements.
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    \31\ ``Swap dealer'' is defined in new CEA section 1a(49), as 
added by section 721(a)(21) of the Dodd-Frank Act. ``Major swap 
participant'' is defined in new CEA section 1a(33), as added by 
section 721(a)(16) of the Dodd-Frank Act.
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    Section 737 of the Dodd-Frank Act amends current CEA section 4a 
regarding position limits. Under the Dodd-Frank provisions and amended 
CEA section 4a, the Commission is directed to adopt position limits for 
futures and options traded on or subject to the rules of a designated 
contract market, and swaps that are economically equivalent to such 
futures and exchange-traded options for both exempt and agricultural 
commodities.
b. Agricultural Swaps
    As noted above, under section 723(c)(3) of the Dodd-Frank Act, 
swaps in an ``agricultural commodity'' (as defined by the Commission) 
\32\ are prohibited unless the swap is entered into pursuant to an 
exemption granted under CEA section 4(c). The requirements of section 
4(c) are discussed in greater detail, below.\33\
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    \32\ See proposed definition of agricultural commodity at 75 FR 
65586, Oct. 26, 2010.
    \33\ Generally speaking, section 4(c) provides that, in order to 
grant an exemption, the Commission must determine that: (1) The 
exemption would be consistent with the public interest and the 
purposes of the CEA; (2) any agreement, contract, or transaction 
affected by the exemption would be entered into by ``appropriate 
persons'' as defined in section 4(c); and (3) any agreement, 
contract, or transaction affected by the exemption would not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory 
duties under the CEA.
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    Dodd-Frank section 723(c)(3)(B) includes a ``grandfather'' clause 
providing that any rule, regulation, or order regarding agricultural 
swaps that was issued pursuant to the Commission's exemptive authority 
in CEA section 4(c), and that was in effect on the date of enactment of 
the Dodd-Frank Act, would continue to be permitted under such terms and 
conditions as the Commission may prescribe. Such rules, regulations or 
orders would include part 35 with respect to agricultural swaps and the 
agricultural basis and calendar swaps noted above, but would not 
include options entered into pursuant to part 32.\34\
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    \34\ Part 32 was not issued pursuant to the Commission's section 
4(c) exemptive authority and thus does not qualify for the Dodd-
Frank grandfather provision for existing 4(c) exemptions. See 
section 723(c)(3)(B) of the Dodd-Frank Act.
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    In addition to the provisions in section 723(c)(3), section 733 of 
the Dodd-Frank Act, new CEA section 5h(b), provides that a SEF may not 
list for trading or confirm the execution of any swap in an 
agricultural commodity (as defined by the Commission) except pursuant 
to a rule or regulation of the Commission allowing the swap under such 
terms and conditions as the Commission shall prescribe.

B. Commodity Options

i. Commodity Options Are Swaps
    The Dodd-Frank Act defines the term ``swap'' to include not only 
the various types of swaps listed in the definition, including 
commodity swaps and agricultural swaps, but also options of any kind 
(other than options on

[[Page 6098]]

futures).\35\ Even before the Dodd-Frank Act, commodity options have 
been subject to the Commission's plenary authority under CEA section 
4c(b).\36\ Based on that general prohibition of any option transactions 
contrary to any Commission rule, regulation or order prohibiting 
options, or allowing them under such conditions as the Commission may 
prescribe, the only options currently authorized under the CEA are 
those specifically provided for in the Commission's regulations.
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    \35\ See new CEA section 1a(47)(B), as added to the CEA by 
section 721 of the Dodd-Frank Act. But see also footnote 6, above, 
for the list of certain options that are excluded from the swap 
definition.
    \36\ Section 4c(b) provides:
    No person shall offer to enter into, enter into or confirm the 
execution of, any transaction involving any commodity regulated 
under this Act 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. CEA section 
4c(b); 7 U.S.C. 6c(b).
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ii. Options on Agricultural Commodities; Trade Options
    As noted above, the Commission maintains plenary authority over 
options and has used that authority to, among other things, issue part 
32 of the Commission's regulations. Part 32 includes a general ban on 
commodity options,\37\ but allows for commodity option transactions 
under certain conditions. Part 32 specifically allows for options on 
agricultural commodities in two instances.\38\
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    \37\ See Commission regulation 32.11, 17 CFR 32.11.
    \38\ Note that part 32 was not issued under the Commission's 
section 4(c) exemptive authority. After the effective date of the 
Dodd-Frank Act, options on agricultural commodities will also fall 
under the Dodd-Frank Act's provisions governing the trading of swaps 
(and, specifically, agricultural swaps) since options on commodities 
fall within the Act's definition of a swap. Accordingly, it is 
important to identify which options on agricultural commodities are 
currently being traded pursuant to part 32 and, where appropriate, 
to implement rules to preserve that market (in addition to rules 
proposed herein that will preserve the majority of the existing non-
agricultural trade option market, subject to the same laws and rules 
as all other swaps).
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    First, rule 32.13 establishes rules for trading bilateral options 
on the ``enumerated'' agricultural commodities (``agricultural trade 
options'' or ``ATOs'') whereby ATOs may only be sold by an Agricultural 
Trade Option Merchant (``ATOM''), who must first register with the 
Commission as such pursuant to CFTC rule 3.13. Since its 1998 adoption 
and one amendment in 1999,\39\ the ATOM registration scheme has 
attracted only one registrant, which registrant has since withdrawn its 
ATOM registration. Accordingly, ATOs currently may only be transacted 
pursuant to an exemptive provision found at Sec.  32.13(g)(1). The 
exemption at Sec.  32.13(g)(1) allows ATOs to be sold when: (1) The 
option is offered to a commercial (``a producer, processor, or 
commercial user of, or a merchant handling'' the underlying commodity); 
(2) the commercial enters the transaction solely for purposes related 
to its business as such; and (3) each party to the option contract has 
a net worth of not less than $10 million.
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    \39\ 63 FR 18821, Apr. 16, 1998; and 64 FR 68011, Dec. 6, 1999, 
respectively.
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    In either case (whether transacted pursuant to the ATOM 
registration scheme or accomplished via the exemption at Sec.  
32.13(g)), the phrase ``agricultural trade option'' refers specifically 
to a trade option on an agricultural commodity enumerated in Sec.  
32.2.
    In addition to the ATO rules in Sec.  32.13, part 32 includes, at 
Sec.  32.4, a basic trade option exemption applicable to options on 
commodities other than the enumerated agricultural commodities. The 
terms of the Sec.  32.4 exemption are essentially the same as those of 
the Sec.  32.13(g) exemption with one significant difference--the Sec.  
32.4 trade option exemption does not include any net worth requirement. 
Under Sec.  32.4, the option must be offered to a producer, processor, 
or commercial user of, or a merchant handling, the commodity, who 
enters into the commodity option transaction solely for purposes 
related to its business as such.
    Because the term ``agricultural commodity'' as used in section 
723(c)(3) of the Dodd-Frank Act refers to more than just the enumerated 
commodities, the Commission recognizes that certain options authorized 
under Sec.  32.4 (e.g. options on coffee, sugar, cocoa, and other 
agricultural products that do not appear in the enumerated commodity 
list) would be considered options on an agricultural commodity. As 
such, and without adopting the rules proposed herein, those options 
would be swaps on an agricultural commodity and would thereby fall 
under the Dodd-Frank Act's general prohibition of agricultural swaps.
iii. Remainder of Part 32
    In addition to the foregoing provisions regarding Sec.  32.13 
agricultural trade options and Sec.  32.4 general trade options, part 
32 contains various other provisions that have been rendered obsolete, 
either by the Dodd-Frank Act, by subsequent Commission rulemaking 
actions, or by the passage of time. The amendments proposed herein 
would substantially update and revise part 32 and remove these 
unnecessary provisions.
iv. Part 33
    As noted above, current part 33 applies to both exchange-traded 
options on futures and exchange-traded options on physical commodities. 
However, Dodd-Frank exempts only options on futures from the swaps 
definition. Therefore, options on physical commodities, even if traded 
on a DCM, are to be regulated as swaps. Accordingly, these proposed 
rules would remove all references to exchange-traded options on 
physicals from part 33.

III. The ANPRM

A. General Description of the ANPRM

    On September 28, 2010 (75 FR 59666), the Commission published an 
advanced notice of proposed rulemaking (``ANPRM'') and request for 
comment on the appropriate conditions, restrictions or protections to 
be included in any rule, regulation or order of the Commission adopted 
pursuant to section 4(c) of the Act governing the trading of swaps in 
an ``agricultural commodity,'' \40\ as defined by the Commission.\41\ 
The Commission requested specific input pertaining to five topics: 
Current Agricultural Swaps Business (overall size, the types of 
entities, and any unique characteristics of agricultural swaps that 
distinguish them from other types of physical commodity swaps); 
Agricultural Swaps Clearing (the extent to which existing swaps are 
cleared or uncleared, whether existing swaps would generally qualify 
for a commercial end-user exemption, and the desirability of a clearing 
requirement for swaps that do not qualify for such an exemption); 
Trading (description of any significant trading problems encountered in 
this market); Agricultural Swaps Purchasers (whether agricultural swaps 
participants need

[[Page 6099]]

more protections than other physical commodity swaps participants, or 
whether special provisions are needed to make it easier for producers 
to participate); Designated Contract Markets (should agricultural swaps 
be permitted on DCMs to the same extent as other swaps); Swap Execution 
Facilities (should agricultural swaps be permitted on SEFs to the same 
extent as other swaps); and Trading Outside of DCMs and SEFs (should 
agricultural swaps be permitted to trade outside of a DCM or SEF to the 
same extent as other swaps, and generally should agricultural swaps be 
treated any differently than other types of physical commodity swaps).
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    \40\ The Commission also informally solicited comments on its 
Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/OTC_19_AgSwaps.html. In addition, Commission staff has met with market 
participants and other interested parties. A complete list of 
external meetings held at the Commission may be found on the 
Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
    \41\ The Commission has published for comment a proposed 
regulatory definition of the term, ``agricultural commodity'' (See: 
75 FR 65586, Oct. 26, 2010, and plans to publish a final definition 
in the near future.
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B. Summary of Comments

    Nineteen formal comment letters representing a broad range of 
interests, including producers, merchants, swap dealers, commodity 
funds, futures industry organizations, and academics/think tanks, 
responded to the ANPRM. In particular, comment letters were received 
from: The American Farm Bureau Federation, the American Soybean 
Association, the Commodity Markets Council, the National Association of 
Wheat Growers, the National Cattlemen's Beef Association, and the 
National Corn Growers Association, who filed a joint statement 
(collectively, ``the Ag Associations''); the National Grain and Feed 
Association (``NGFA''); the Commodity Markets Council (``CMC,'' which 
filed a separate letter in addition to signing onto the joint statement 
noted above); the National Milk Producers Federation (``NMPF''); the 
Dairy Farmers of America (``DFA''); the National Council of Farmer 
Cooperatives (``NCFC''); the Gavilon Group, LLC (``Gavilon''), a feed 
manufacturer; Cargill, an agricultural commodities merchant; Allenberg 
Cotton, a cotton merchant; the Agricultural Commodity Swaps Working 
Group (``Ag Swap Working Group''), comprised of financial institutions 
that provide risk management and investment products to agricultural 
end users; the International Swaps and Derivatives Association 
(``ISDA''); United States Commodity Funds (``USCF''); the Alternative 
Investment Management Association, Ltd. (``AIMA''); International 
Assets Holding Corporation (``IAHC''); Teucrium Trading; the Futures 
Industry Association (``FIA''); the CME Group, Inc. (``CME''); the 
Institute for Agriculture and Trade Policy (``IATP''); and Dr. Robert 
Pollin, a university professor.\42\
---------------------------------------------------------------------------

    \42\ In addition, two comments were received that did not 
directly address the ANPRM.
---------------------------------------------------------------------------

    The vast majority of commenters supported the equal treatment of 
agricultural swaps (including trade options) under the same regulatory 
scheme as other categories of swaps. The following statement from the 
Ag Associations is representative of this sentiment:

    Ag swaps are used, to varying degrees, by our members because 
they provide a targeted, customized, cost-effective, and efficient 
risk management strategy * * * In a world with increasing inherent 
volatility, the need for risk management instruments has never been 
greater.
    We urge the Commission to treat swaps for all commodities 
harmoniously. We believe the comprehensive regulation of swaps 
should not be based on distinctions among commodity types. The 
generally applicable protections under the Dodd-Frank Bill--such as 
reporting, mandatory clearing, mandatory trading of standardized 
swaps, minimum capital requirements, and the CFTC's authority to 
impose position limits, determine which swaps are subject to 
clearing and trading and to exercise emergency powers--will protect 
ag swaps from fraud and manipulation.

    Two commenters (Dr. Pollin and the IATP) were generally opposed to 
the trading of agricultural swaps under the same conditions as other 
physical commodity swaps. Both commenters expressed the belief that 
speculative investment in agricultural derivatives has increased price 
volatility, to the detriment of producers and consumers of agricultural 
products, and that trading in agricultural swaps could potentially 
exacerbate this problem.
    Commenters offered the following specific information and/or 
individual perspectives on the five topic areas outlined above:
    Current Agricultural Swaps Business. Regarding the state of the 
current agricultural swaps business (including trade options), 
commenters generally noted that agricultural swaps are used to a 
considerable extent, but they were unable to quantify the overall size 
of this market. Swap participants include commercial end users 
(producers, processors and merchants), hedge funds, swap dealers, and 
financial institutions. Generally, commenters did not believe that the 
characteristics of agricultural swaps were significantly different from 
the characteristics of other types of physical commodity swaps.
    Agricultural Swaps Clearing. According to the commenters, most 
agricultural swap activity (including trade options) is not cleared 
(for example, the NCFC estimated that less than one percent of its 
members' swaps are cleared). Several commenters pointed to the small 
amount of swaps cleared by DCOs under existing 4(c) exemptions, 
relative to the presumed size of the market, as evidence of how few 
swaps are cleared. Commenters representing agricultural producers and 
merchants indicated that virtually all of their swaps would qualify for 
the end-user exemption from the mandatory clearing requirement of the 
Dodd-Frank Act. Furthermore, most commenters suggested that 
agricultural swaps should be individually scrutinized as to their 
clearability, rather than subjecting all agricultural swaps to a 
clearing requirement. (NCFC, for example, observed that, ``the low 
volume, small sizes and odd lots [of many agricultural swaps] would not 
be attractive for exchanges or clearing houses to offer those specific 
products.'' Thus, ``if all entities are required to clear agricultural 
swaps through an exchange or standardize a non-standard transaction 
(both in terms of quantity and structure), costs would likely increase 
to a point where the use of swaps as a bona fide hedge/risk management 
tool would not be available to segments of the agricultural 
marketplace.'') IATP, however, supported mandatory clearing for all 
agricultural swaps as a means of discouraging producers from 
participating directly in this market.
    Trading Practices and Issues. Commenters generally were not aware 
of any specific problems pertaining to the existing trade in 
agricultural swaps and most saw no need for additional requirements for 
trading agricultural swaps relative to other types of swaps. Some 
commenters did observe that the Commission's existing regulatory 
requirements governing agricultural trade options in the enumerated 
agricultural commodities (as distinct from other types of physical 
commodities) have restricted the development of this market to the 
detriment of commercial end users (see, for example, comments by CMC, 
Gavilon and DFA).
    Additional Protections for Agricultural Swaps Purchasers. Most 
commenters did not believe that agricultural swaps participants need 
more protection than participants in other types of commodity swaps. 
Most commenters also believed that the Dodd-Frank Act requirement, 
limiting swap purchasers to ``eligible contract participants'' 
(``ECPs''), is appropriate to apply to the purchasers of agricultural 
commodity swaps. However, several commenters suggested that 
transactions within farmer cooperatives (that is,

[[Page 6100]]

between individual farmer members and their local elevator cooperative, 
and between affiliated cooperatives at the local, regional or national 
levels) should not be subject to the ECP requirement (for example, the 
NCFC states that individual members who do not meet the ECP requirement 
should be permitted to purchase swaps directly from their producer 
cooperatives, and the NMPF argues that transactions between members and 
their cooperatives are internal transactions and should be treated as 
such, rather than be subject to provisions that govern transactions 
between unaffiliated parties). In addition, one commenter favored 
making agricultural trade options (but not other types of swaps) 
available from registered swap dealers to non-ECPs who enter into them 
explicitly for commercial risk management purposes (see Cargill 
comment).
    Trading on DCMs and SEFs. Commenters generally supported the 
listing and trading of agricultural swaps (including options) on DCMs 
and SEFs to the same extent as other physical commodity swaps, with the 
exception of Dr. Pollin and the IATP.
    Trading off of DCMs and SEFs. Commenters generally expressed the 
opinion that agricultural swaps (including options) should be permitted 
to trade outside of DCMs and SEFs under the same conditions that apply 
to other types of physical commodity swaps (again, with the exception 
of the IATP and Dr. Pollin). Most commenters did not believe there were 
any specific agricultural commodities that would require special or 
different protections. IATP expressed the opinion that ``A higher 
collateral and capital requirement should be applied to any bilateral 
swaps a CFTC rule would allow.'' Dr. Pollin argued that there is no 
good reason for offering any exemptions from the blanket prohibition on 
agricultural swaps contained in the Dodd-Frank Act.
    In addition to comments addressing the five specific topic areas 
directly related to the ANPRM, several commenters requested that the 
Commission provide clarity on the treatment of certain types of swap 
participants and transactions within the overall regulatory scheme for 
swaps. In this regard, several commenters requested that the Commission 
clarify that agricultural producer cooperatives that enter into swaps 
with their own members or third parties in the course of marketing 
their members' agricultural products should be considered to be end 
users for purposes of the clearing exception, and further that the 
Commission should clarify that producer cooperatives are excluded from 
the definitions of swap dealer and major swap participant (see, for 
example, comments from NGFA, NCFC, NMPF, and DFA). These issues are 
beyond the scope of this proposed rulemaking. The Commission has issued 
proposed rules regarding: (1) The end-user exception to mandatory 
clearing of swaps pursuant to Sec.  723 of the Dodd-Frank Act; \43\ and 
(2) further definition of certain terms regarding market participants, 
including the terms ``swap dealer'' and ``major swap participant,'' 
pursuant to Sec.  712(d) of the Dodd-Frank Act.\44\ The Commission 
encourages all interested parties to submit comments addressing these 
proposed rules, including responses to the requests for comment set 
forth therein.
---------------------------------------------------------------------------

    \43\ See: End User Exception to Mandatory Clearing of Swaps, 75 
FR 80747, Dec. 23, 2010 (comment period closes February 22, 2011).
    \44\ See: Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' 75 
FR 80174, Dec. 21, 2010 (joint rulemaking with Securities and 
Exchange Commission (``SEC''), comment period closes February 22, 
2011).
---------------------------------------------------------------------------

    Some commenters also requested that the Commission clarify that 
certain types of transactions (embedded options in forward contracts 
\45\ and book-outs \46\) fall within the definition of an excluded 
forward contract rather than the definition of a swap. These issues, 
too, are beyond the scope of this proposed rulemaking. Commission 
staff, jointly with staff of the SEC, is also considering further 
definition of terms regarding certain products, including the term 
``swap,'' pursuant to Sec.  712(d) of the Dodd-Frank Act. Any comment 
addressing the distinction between swaps and forward contracts will be 
shared with appropriate staff.
---------------------------------------------------------------------------

    \45\ See: Characteristics Distinguishing Cash and Forward 
Contracts and ``Trade'' Options, Interpretive Statement of the 
Commission's General Counsel, 50 FR 39656, Sept. 30, 1985, regarding 
the differences between forward contracts and options.
    \46\ A book-out is a separate, subsequent agreement whereby two 
commercial parties to a forward contract, who find themselves in a 
delivery chain or circle at the same delivery point, can agree to 
settle (or ``book-out'') their delivery obligations by exchanging a 
net payment. See: Statutory Interpretation Regarding Forward 
Transactions, 55 FR 39188, Sept. 25, 1990.
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IV. Explanation of the Proposed Rules

A. Introduction

    After considering the complete record in this matter, including all 
comments on the ANPRM, the Commission is proposing the rulemaking 
contained herein. Broadly speaking, the proposed rules would implement 
regulations whereby (1) swaps in agricultural commodities, and (2) all 
commodity options (including options on both agricultural and non-
agricultural commodities), other than options on futures, may transact 
subject to the same rules as all other swaps.
    First, the proposal would withdraw existing part 35 of the 
Commission's regulations--thus withdrawing the provisions originally 
adopted in 1993 to provide legal certainty for the bilateral swaps 
market by largely exempting bilateral swaps transactions from CEA 
regulation.\47\ Second, pursuant to the exemptive authority in CEA 
section 4(c), the proposed rules would adopt a new part 35 to provide 
the primary authority for transacting swaps in an agricultural 
commodity (``agricultural swaps'') as authorized by Sections 723(c)(3) 
and 733 of the Dodd-Frank Act. Third, the proposed rulemaking would 
substantially update and revise the existing framework for off-exchange 
options in existing part 32. In part pursuant to the exemptive 
authority in CEA section 4(c) and in part pursuant to the Commission's 
general rulemaking authority set out at CEA section 8a(5) and the 
Commission's plenary authority over options, revised part 32 would 
affirm that all commodity options (other than options on futures) are 
swaps, and as such will be subject to all provisions of the CEA 
otherwise applicable to swaps, including any rule, regulation, or order 
thereunder. The proposed rulemaking would also withdraw rule 3.13, 
which sets out procedures for the registration of agricultural trade 
option merchants and their associated persons. Rule 3.13 will become 
moot upon the withdrawal of rule 32.13, which includes the underlying 
registration requirement. Finally, the proposed rules would revise part 
33 to delete references to exchange-traded options on physical 
commodities (which will now be regulated as swaps), leaving only 
exchange-traded options on futures subject to part 33.
---------------------------------------------------------------------------

    \47\ ``[Part 35 * * *] exempt[s] swap agreements (as defined 
herein) meeting specified criteria from regulation under the 
Commodity Exchange Act (the ``Act''). This rule was proposed 
pursuant to authority recently granted the Commission, a purpose of 
which is to give the Commission a means of improving the legal 
certainty of the market for swaps agreements.'' 58 FR 5587, Jan. 22, 
1993.
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B. Withdrawal of Current Part 35

    In enacting the Futures Trading Practices Act of 1992 (the ``1992 
Act''),\48\ Congress added section 4(c) to the CEA and authorized the 
Commission, by rule, regulation, or order, to exempt any agreement, 
contract or transaction, or class thereof, from the exchange-trading

[[Page 6101]]

requirement of CEA section 4(a), or (with minor exceptions not relevant 
here) from any other provision of the Act.\49\ Pursuant to its new 
authority in section 4(c), the Commission proposed in 1992 \50\ and 
adopted in 1993 \51\ part 35 of the Commission's regulations, generally 
exempting certain swap agreements from the CEA. As explained above, 
part 35 originally applied to all commodities. However, certain 
amendments to the CEA made by the CFMA had the effect of making part 35 
relevant only for swaps in agricultural commodities.
---------------------------------------------------------------------------

    \48\ Public Law 102-546 (Oct. 28, 1992).
    \49\ While section 4(c) was amended by the Dodd-Frank Act, for 
the purposes of this rulemaking its function and effect have not 
changed. See 4(c) discussion, below.
    \50\ See the original proposal at 57 FR 53627, Nov. 12, 1992. 
See also 57 FR 58423, Dec. 28, 1992, extending the comment period 
for an additional fourteen days.
    \51\ 58 FR 5587, Jan. 22, 1993.
---------------------------------------------------------------------------

    The Dodd-Frank Act amends, repeals, or replaces many CEA sections 
added by the CFMA (including the statutory exemptions for swaps in 
excluded and exempt commodities at current CEA sections 2(d), 2(g), and 
2(h)). To avoid any uncertainty as to whether the Commission will allow 
bilateral swaps in non-agricultural commodities to revert to reliance 
on existing part 35 for exemption from the CEA and the Dodd-Frank 
amendments, the Commission is proposing to revoke current part 35 in 
its entirety. Once part 35 is revoked, the only swaps authorized under 
the CEA or the Commission's rules will be those swaps that comport with 
the requirements of the CEA, as amended by the Dodd-Frank Act.\52\
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    \52\ Section 723(c)(3)(B) of the Dodd-Frank Act grandfathers 
existing 4(c) orders that relate to agricultural swaps unless 
superseded by subsequent Commission order. This notice of proposed 
rulemaking is not taking any action to alter the continued 
effectiveness of the orders identified in footnote 24 above. See 
also, 76 FR [ ---------- ] n. 38Jan. 20, 2011.
---------------------------------------------------------------------------

C. Proposed New Part 35

    The provisions of proposed new part 35 would generally provide that 
agricultural swaps may be transacted subject to all provisions of the 
CEA, and any Commission rule, regulation or order thereunder, that is 
otherwise applicable to swaps. New part 35 would also clarify that by 
issuing a rule allowing agricultural swaps to transact subject to the 
laws and rules applicable to all other swaps, the Commission is 
allowing agricultural swaps to transact on DCMs, SEFs, or otherwise to 
the same extent that all other swaps are allowed to trade on DCMs, 
SEFs, or otherwise.

D. Revisions to Part 32

    Because commodity options (other than options on futures) clearly 
fall within the Dodd-Frank Act definition of swap,\53\ the Commission 
is proposing to substantially update and revise the now duplicative 
off-exchange commodity option regulations set forth in current part 32. 
Revised part 32, authorized by the Commission's plenary options 
authority, will provide legal certainty for the commodity options 
market by making it clear that commodity options (other than options on 
futures) are authorized to continue subject to all provisions of the 
CEA, and any rule, regulation, or order thereunder, that is otherwise 
applicable to swaps.
---------------------------------------------------------------------------

    \53\ See footnote 6 above.
---------------------------------------------------------------------------

    In order to support the revisions to part 32, including the 
withdrawal of several sections in their entirety, the Commission 
reviewed and analyzed each provision of existing part 32, including the 
corresponding history of the Commission's development of commodity 
options regulation. Based on its review, 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.
i. 1978 Suspension of Commodity Options (Sec.  32.11)
    From a historical perspective, the Commission adopted its first 
broad anti-fraud rule applicable to commodity options transactions on 
June 24, 1975.\54\ After an unsuccessful effort to generally permit 
off-exchange commodity options subject to certain rules and regulations 
(that is, original part 32),\55\ the Commission issued a general 
suspension of commodity options transactions in 1978.\56\ The 
suspension was adopted by the Commission on April 17, 1978 and was 
added to the original part 32 as Sec.  32.11.\57\ Upon its adoption in 
1978, Sec.  32.11 suspended all commodity option transactions (except 
for those trade options authorized by Sec.  32.4) \58\ that had been 
otherwise authorized by original part 32. Aside from later amendments 
that authorized commodity options conducted on or subject to the rules 
of a contract market \59\ or a foreign board of trade,\60\ current 
Sec.  32.11 remains in the same form as when originally adopted in 
1978. Accordingly, the bulk of original part 32, as discussed below, 
has been obsolete and/or irrelevant since the adoption of Sec.  32.11 
in 1978. This includes the registration requirements in Sec.  32.3, the 
disclosure requirements in Sec.  32.5, the segregation requirements in 
Sec.  32.6, and the books and recordkeeping requirements in Sec.  32.7.
---------------------------------------------------------------------------

    \54\ 40 FR 26504, June 24, 1975. Originally designated as 17 CFR 
30.01, the provision was re-designated as Sec.  32.9 and 
incorporated into the original part 32 regulations adopted on 
November 24, 1976.
    \55\ See discussion and review of original part 32 below.
    \56\ Exchange-traded options on futures were not affected since 
they were not available at the time and only later became available 
when the Commission initiated a pilot program to allow exchange-
traded options on futures in 1981. See 46 FR 54500, Nov. 3, 1981.
    \57\ See 43 FR 16153, Apr. 17, 1978.
    \58\ Dealer options, which were also being traded at the time, 
were also subsequently exempted from the general options ban. See 43 
FR 23704, June 1, 1978. Dealer options are discussed below in 
connection with the withdrawal of rule 32.12.
    \59\ See 47 FR at 57016, Dec. 22, 1982.
    \60\ See 52 FR at 29003, Aug. 5, 1987.
---------------------------------------------------------------------------

ii. Original Part 32 (Sec. Sec.  32.1-32.10)
    Original part 32 was adopted by the Commission on November 24, 
1976, and included substantially the same provisions as they exist in 
current Sec. Sec.  32.1-32.10.\61\
---------------------------------------------------------------------------

    \61\ See 43 FR 51808, Nov. 24, 1976.
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a. 32.1
    The definitions section, Sec.  32.1, has been substantively 
modified only once \62\ since its adoption in 1976. That revision added 
a scope provision as Sec.  32.1(a). The purpose of adding the scope 
provision was to make clear that part 32 applied only to off-exchange 
bilateral options, and that it would not apply to commodity options 
conducted on or subject to the rules of a contract market. The Sec.  
32.1(a) scope provision was amended once in 1987 to also exclude from 
part 32 commodity options conducted on or subject to the rules of a 
foreign board of trade.\63\ Beyond that, Sec.  32.1 has not been 
substantively amended since its adoption in 1976.
---------------------------------------------------------------------------

    \62\ See 47 FR at 57016, Dec. 22, 1982.
    \63\ See 52 FR at 29003, Aug. 5, 1987.
---------------------------------------------------------------------------

    Because commodity options (other than options on futures) are now 
swaps and will be authorized to transact subject to the swaps rules, 
the scope provision in Sec.  32.1 has been updated and retained in 
revised part 32 as appropriate. The proposal would delete the 
definitions in current Sec.  32.1 as duplicative--the terms therein are 
already defined elsewhere, either in other Commission regulations or in 
the CEA, and there is no need for their repetition in part 32.
b. 32.2
    As originally adopted, Sec.  32.2(a) prohibited commodity options 
transactions on a list of enumerated

[[Page 6102]]

agricultural commodities and Sec.  32.2(b) prohibited commodity options 
involving any contract of sale of any commodity for future delivery 
traded on or subject to the rules of any contract market or involving 
the prices of such contracts, unless done pursuant to a subsequent 
Commission rulemaking. Section 32.2 was amended once in 1992 to remove 
Sec.  32.2(b),\64\ and Sec.  32.2 was amended again in 1998 to 
reference the Commission's newly adopted Agricultural Trade Option 
rules in Sec.  32.13. Because this proposal would treat agricultural 
swaps the same as swaps in any other commodity, and because all 
commodity options (other than options on futures) are now swaps, it is 
no longer necessary to distinguish between agricultural and non-
agricultural commodities for the purposes of the Commission's options 
regulations, and thus the Commission is proposing to withdraw Sec.  
32.2.
---------------------------------------------------------------------------

    \64\ See 57 FR 27925, June 23, 1992. At that time, original 
Sec.  32.2(a) was re-designated as simply Sec.  32.2.
---------------------------------------------------------------------------

c. 32.3, 32.5, 32.6, and 32.7
    As adopted in 1976, Sec.  32.3 provided that only firms registered 
as futures commission merchants, or registered associated persons of 
such firms, could offer or sell commodity options under part 32. 
Section 32.5 imposed certain disclosure requirements for options 
sellers, Sec.  32.6 addressed segregation of funds, and Sec.  32.7 set 
forth the books and recordkeeping requirements. Because the 1978 
suspension of commodity options in Sec.  32.11 remains in effect, the 
requirements in Sec. Sec.  32.3, 32.5, 32.6, and 32.7 (the ``abandoned 
sections'') are of no practical effect--there are no authorized 
transactions subject to these abandoned sections. The commodity options 
that are allowed to transact outside of the Sec.  32.11 suspension 
(e.g., Sec.  32.4 trade options, Sec.  32.12 dealer options, Sec.  
32.13 agricultural trade options, and commodity option transactions 
conducted on or subject to the rules of a contract market or a foreign 
board of trade) are each exempted from the requirements of the 
abandoned sections. Accordingly, the proposal would withdraw Sec. Sec.  
32.3, 32.5, 32.6, and 32.7.
d. 32.4
    From its adoption, part 32 has included, in Sec.  32.4, an 
exemption for commodity options used by commercial entities entering 
into the commodity option transactions solely for purposes related to 
their business.\65\ The so-called ``trade option exemption'' has 
remained unchanged since 1976 and has provided legal certainty for that 
segment of the commodity options market available to commercial end 
users. This notice proposes revising the trade option exemption to 
provide that commodity options may transact subject to the same laws, 
rules, regulations, and orders otherwise applicable to all swaps. The 
rationale for the revision is that the swaps rules already allow for 
the equivalent of a trade option--the Dodd-Frank amendments permit 
bilateral swaps, where both parties are ECPs,\66\ to remain uncleared 
at the election of a commercial end user. The primary substantive 
change to this market will be that, while current Sec.  32.4 imposes no 
minimum net worth requirement on participants, both purchasers and 
sellers of commodity options under revised Sec.  32.4 will have to 
qualify as ECPs, just as swaps (other than swaps on a DCM) may only be 
entered into by ECPs. The Commission is specifically requesting comment 
as to whether this distinction will significantly affect hedging 
opportunities available to currently active market participants.
---------------------------------------------------------------------------

    \65\ Sec.  32.4(a) 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.'' See Sec.  32.4(a).
    \66\ See footnote 26, above.
---------------------------------------------------------------------------

e. 32.8 and 32.9
    Sections 32.8 and 32.9 address unlawful representations and fraud 
in connection with commodity option transactions. These two consumer 
protection provisions are important to both the Commission and the 
commodity options markets. Even though commodity options are now swaps, 
subject to the swaps rules and any anti-fraud or other customer 
protection rules otherwise applicable to swaps, the Commission views 
Sec. Sec.  32.8 and 32.9 as important protections for commodity options 
participants. With the exception of a minor revision expanding the 
unlawful representation prohibition of Sec.  32.8(a) to all Commission 
registrants, Sec. Sec.  32.8 and 32.9 will be retained in substantially 
the same form as they currently exist. The retention of Sec. Sec.  32.8 
and 32.9 will not affect the applicability to options of any anti-fraud 
or other similar rule that is applicable to a swap. That is, Sec. Sec.  
32.8 and 32.9 are being retained in addition to any other protections 
provided by the general swaps rules.
f. 32.10
    Section 32.10 grandfathered commodity options transactions 
occurring prior to the effective adoption of original part 32. Revised 
part 32 would update the current text with a similar grandfather 
provision for existing commodity options transacted pursuant to current 
part 32. Generally, commodity options transacted pursuant to current 
part 32 (and prior to the effective date of any revision to current 
part 32) will remain enforceable upon the adoption of any revision to 
part 32.
iii. Subsequent Additions to Part 32--Sec. Sec.  32.12 and 32.13
a. 32.12--Dealer Options
    Section 32.12, commonly known as the dealer options exemption, was 
added to original part 32 on June 1, 1978.\67\ The dealer options rules 
provided an exemption from the Commission's then recently adopted 
options ban at Sec.  32.11 (recall that the Sec.  32.11 options ban was 
originally adopted on April 17, 1978).\68\ Amended two times shortly 
after its adoption--once to adjust a net worth requirement \69\ and 
again to include certain reporting requirements \70\--the Sec.  32.12 
dealer options rules were intended to grandfather the ongoing 
businesses of certain commercial option grantors who, as of May 1, 
1978, were both in the business of granting options on a physical 
commodity and in the business of buying, selling, producing, or 
otherwise utilizing that commodity.
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    \67\ See 43 FR 23704, June 1, 1978.
    \68\ See 43 FR 16153, Apr. 17, 1978.
    \69\ See 43 FR 47492, Oct. 16, 1978.
    \70\ See 43 FR 52467, Nov. 13, 1978.
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    The primary factor in the Commission's determination to withdraw 
Sec.  32.12 at this time is that the dealer option business has 
apparently ceased to exist. Since at least September 11, 2001,\71\ and 
likely for at least another decade before that,\72\ the Commission has 
not received a single report required to be filed by an entity 
transacting dealer options under Sec.  32.12. That observation, in 
conjunction with

[[Page 6103]]

the requirement that to rely on Sec.  32.12 a dealer has to have been 
in this business as of May 1, 1978, implies that no entity is legally 
relying on Sec.  32.12 for any currently transacted business activity. 
The Commission is specifically requesting comment as to whether there 
is any reason not to withdraw Sec.  32.12 in its entirety, and whether 
any person, group of persons, or class of transactions is prejudiced or 
otherwise harmed by such action.
---------------------------------------------------------------------------

    \71\ September 11, 2001 is, of course, the day that the 
Commission's hard copy records contained in its New York regional 
office in the World Trade Center were lost. The records would have 
included any Sec.  32.12 reports, which were required to be filed 
with and retained at the Commission's New York regional office in 
hard copy form.
    \72\ Interviews of long-serving Commission staff indicate no 
recollections of entities transacting pursuant to the Sec.  32.12 
dealer options exemption for at least the past 20 years. The 
apparent cessation of the dealer options business should not come as 
a surprise. It was widely expected at the time that when exchange-
traded options became available (which happened starting in 1981) 
the dealer option business would fade away. It appears that this is, 
in fact, what happened.
---------------------------------------------------------------------------

b. 32.13--Agricultural Trade Options
    Section 32.13 and agricultural trade options are described in the 
Background section above. Added to part 32 in 1998,\73\ and amended 
once thereafter,\74\ the ATOM registration regime has been largely 
unused. It has attracted only one registrant, which registrant has 
since withdrawn its registration. However, the exemption for 
agricultural trade options meeting certain conditions as specified in 
Sec.  32.13(g) appears to be widely used. Because the Commission is 
proposing to authorize agricultural swaps in new part 35, and to re-
authorize commodity options to transact as swaps (with no distinction 
as between agricultural and non-agricultural commodities) in revised 
Sec.  32.4, the Commission is proposing to withdraw Sec.  32.13 in its 
entirety.\75\ The primary effect of the change would be to remove the 
$10 million net worth requirement for parties relying on the Sec.  
32.13(g) exemption for agricultural trade options. Under revised Sec.  
32.4, parties need only qualify as ECPs, which category would include 
certain persons with a net worth of less than $10 million.
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    \73\ See 63 FR 18832, Apr. 16, 1998.
    \74\ See 64 FR 68011, Dec. 6, 1999.
    \75\ In addition, the proposal would withdraw Sec.  3.13 in its 
entirety. Section 3.13 outlines the registration procedures for 
ATOMs, and will become be moot upon the withdrawal of Sec.  32.13.
---------------------------------------------------------------------------

E. Part 33

    As noted above, the Commission is proposing to amend part 33 to 
remove references to options on physical commodities. All options on 
physicals would now be regulated as swaps, leaving only exchange-traded 
options on futures subject to part 33. Treating options on physicals 
that are traded on a DCM as swaps would have little practical effect 
since anyone (including non-ECPs) could continue to trade such 
instruments on a DCM. In addition, qualified persons (ECPs) could trade 
similar options on physical commodities in the non-DCM environment, 
including on SEFs, subject to the same rules as other physical 
commodity swaps.

V. Findings Pursuant to Section 4(c)

    As noted above, section 723(c)(3)(A) of the Dodd-Frank Act 
prohibits swaps in an agricultural commodity. However, section 
723(c)(3)(B) of the Dodd-Frank Act explicitly provides that the 
Commission may permit swaps in an agricultural commodity pursuant to 
CEA section 4(c), the Commission's general exemptive authority, ``under 
such terms and conditions as the Commission shall prescribe.'' 
Accordingly, certain of the amendments proposed herein are proposed for 
adoption pursuant to section 4(c), as amended by the Dodd-Frank Act.
    Section 4(c)(1) of the CEA authorizes the CFTC to exempt any 
transaction or class of transactions from any of the provisions of the 
CEA (subject to exceptions not relevant here) in order to ``promote 
responsible economic or financial innovation and fair competition.'' 
\76\ The Commission may grant such an exemption by rule, regulation, or 
order, after notice and opportunity for hearing, and may do so on 
application of any person or on its own initiative. In enacting section 
4(c), Congress noted that the goal of the provision ``is to give the 
Commission a means of providing certainty and stability to existing and 
emerging markets so that financial innovation and market development 
can proceed in an effective and competitive manner.'' \77\
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    \76\ New section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), as 
amended by the Dodd-Frank Act, provides in full that:
     In order to promote responsible economic or financial 
innovation and fair competition, the Commission by rule, regulation, 
or order, after notice and opportunity for hearing, may (on its own 
initiative or on application of any person, including any board of 
trade designated or registered as a contract market or derivatives 
transaction execution facility for transactions for future delivery 
in any commodity under section 5 of this Act) exempt any agreement, 
contract, or transaction (or class thereof) that is otherwise 
subject to subsection (a) (including any person or class of persons 
offering, entering into, rendering advice or rendering other 
services with respect to, the agreement, contract, or transaction), 
either unconditionally or on stated terms or conditions or for 
stated periods and either retroactively or prospectively, or both, 
from any of the requirements of subsection (a), or from any other 
provision of this Act (except subparagraphs (C)(ii) and (D) of 
section 2(a)(1), except that--
     (A) unless the Commission is expressly authorized by any 
provision described in this subparagraph to grant exemptions, with 
respect to amendments made by subtitle A of the Wall Street 
Transparency and Accountability Act of 2010--
     (i) with respect to--
     (I) paragraphs (2), (3), (4), (5), and (7), paragraph 
(18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39), 
(41), (42), (46), (47), (48), and (49) of section 1a, and sections 
2(a)(13), (2)(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a), 
5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and
     (II) section 206(e) of the Gramm-Leach-Bliley Act (Pub. L. 106-
102; 15 U.S.C. 78c note); and
     (ii) in sections 721(c) and 742 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act; and
     (B) the Commission and the Securities and Exchange Commission 
may by rule, regulation, or order jointly exclude any agreement, 
contract, or transaction from section 2(a)(1)(D)) if the Commissions 
determine that the exemption would be consistent with the public 
interest.
    \77\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
---------------------------------------------------------------------------

    In order to analyze the effect of permitting agricultural swaps to 
trade under the same terms and conditions as other swaps, it is 
appropriate to examine some of the major components of the Dodd-Frank 
Act that apply to swaps generally. Section 727 of the Dodd-Frank Act 
adds, among other things, a new CEA section 2(a)(13) that mandates that 
swap transaction and pricing data be made available to the public. 
Section 723(a)(3) of the Dodd-Frank Act adds a new CEA section 2(h) 
that provides that the Commission shall determine which swaps are 
subject to a mandatory clearing requirement. New CEA section 2(h) also 
provides that swaps that are required to be cleared must be executed on 
a DCM or SEF, if a DCM or SEF makes the swap available for trading. As 
noted above, part 35, as it is currently written, does not permit 
clearing of agricultural swaps and does not contemplate any reporting 
of agricultural swaps data.
    Permitting agricultural swaps to trade under the same terms and 
conditions as other swaps should provide greater certainty and 
stability to existing and emerging markets so that financial innovation 
and market development can proceed in an effective and competitive 
manner. Treating all swaps, including agricultural swaps, in a 
consistent manner should provide greater certainty to markets. The 
Dodd-Frank Act reporting and trade execution requirements should lead 
to greater market and price transparency, which may improve market 
competition, innovation, and development. Centralized clearing of 
agricultural swaps by robustly regulated central clearinghouses should 
reduce systemic risk and provide greater certainty and stability to 
markets by reducing counterparty risk.
    The Commission is requesting comment on whether swaps in 
agricultural commodities should be subject to the same legal 
requirements as swaps in other commodities.
    Section 4(c)(2) of the CEA provides: That the Commission may grant 
exemptions only when it determines that the requirements for which an 
exemption is being provided should not be applied to the agreements, 
contracts or transactions at issue; that the exemption is consistent 
with the public

[[Page 6104]]

interest and the purposes of the CEA; that the agreements, contracts or 
transactions will be entered into solely between appropriate persons; 
and that the exemption will not have a material adverse effect on the 
ability of the Commission or Commission-regulated markets to discharge 
their regulatory or self-regulatory responsibilities under the CEA.\78\
---------------------------------------------------------------------------

    \78\ Section 4(c)(2) of the CEA, 7 U.S.C. 6(c)(2), provides in 
full that:
     The Commission shall not grant any exemption under paragraph 
(1) from any of the requirements of subsection (a) of this section 
unless the Commission determines that--
     (A) The requirement should not be applied to the agreement, 
contract, or transaction for which the exemption is sought and that 
the exemption would be consistent with the public interest and the 
purposes of this Act; and
     (B) The agreement, contract, or transaction--
     (i) Will be entered into solely between appropriate persons; 
and
     (ii) Will not have a material adverse effect on the ability of 
the Commission or any contract market or derivatives transaction 
execution facility to discharge its regulatory or self-regulatory 
duties under this Act.
---------------------------------------------------------------------------

    The purposes of the CEA include ``ensur[ing] the financial 
integrity of all transactions subject to this Act and the avoidance of 
systemic risk'' and ``promot[ing] responsible innovation and fair 
competition among boards of trade, other markets and market 
participants.'' \79\ As noted above, centralized clearing of 
agricultural swaps (which is not permitted under the current part 35 
rules) should reduce systemic risk. Also, allowing agricultural swaps 
to trade under the general swaps rules contained in the Dodd-Frank Act 
would allow agricultural swaps to trade on SEFs and DCMs (which is 
prohibited under the current part 35 rules) which may result in 
increased innovation and competition in the agricultural swaps market. 
Reducing systemic risk and increasing innovation and competition by 
permitting agricultural swaps to trade under the same terms and 
conditions as other swaps would be consistent with the purposes listed 
above, the general purposes of the CEA, and the public interest. The 
Commission is requesting comment on this issue.
---------------------------------------------------------------------------

    \79\ CEA section 3(b), (7 U.S.C. 5(b)).
---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act contains substantial new 
clearing and trade execution requirements for swaps. The clearing 
requirement is designed, among other things, to reduce the counterparty 
risk of a swap, and therefore systemic risk. The swap reporting and 
trade execution requirements should provide additional market 
information to the Commission, the markets, and the public. Thus, 
treating agricultural swaps in the same manner as other swaps may 
enhance the ability of the Commission or Commission-regulated markets 
to discharge their regulatory or self-regulatory responsibilities under 
the CEA.
    Section 4(c)(3) of the CEA includes within the term ``appropriate 
persons'' a number of specified categories of persons, and also in 
subparagraph (K) thereof ``such other persons that the Commission 
determines to be appropriate in light of * * * the applicability of 
appropriate regulatory protections.'' Section 723(a)(2) of the Dodd-
Frank Act adds, among other things, a new CEA section 2(e) that 
provides: ``It shall be unlawful for any person, other than an eligible 
contract participant, to enter into a swap unless the swap is entered 
into on, or subject to the rules of, a [DCM].'' \80\ In light of the 
comprehensive new regulatory scheme for swaps and the enhancements made 
to the already robust regulatory system concerning DCMs \81\ that are 
contained in the Dodd-Frank Act, the limitation on participation to 
eligible contract participants outside of a DCM, and the ability of 
others to enter into a swap on a DCM, should limit participation to 
appropriate persons. The Commission requests comment on this issue.
---------------------------------------------------------------------------

    \80\ New CEA section 2(e), (7 U.S.C. 2(e)).
    \81\ See, for example, new CEA section 5(d) (7 U.S.C. 7(d)) as 
added by section 735(b) of the Dodd-Frank Act and amended CEA 
section 5c (7 U.S.C. 7a-2) as amended by section 745 of the Dodd-
Frank Act.
---------------------------------------------------------------------------

VI. Request for Comments Regarding the Proposed Rules

    In addition to specifically requesting comment on the foregoing 
questions related to the issuance of a 4(c) order, and the other 
questions set out in the preceding sections of this notice of proposed 
rulemaking, the Commission poses the following questions:
    1. Generally, will the rule changes and amendments proposed herein 
provide an appropriate regulatory framework for the transacting of (a) 
agricultural swaps, and (b) trade options on all commodities?
    2. Does the proposal for new part 35 appropriately address all 
outstanding issues as they relate to the transaction of swaps in an 
agricultural commodity?
    3. Regarding the proposed revisions to part 32, and specifically 
the revised Sec.  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 Sec.  32.4 as proposed? In particular, are there 
persons who offer or purchase trade options on non-enumerated 
agricultural commodities (e.g., coffee, sugar, cocoa) under current 
Sec.  32.4 who would not qualify as ECPs and would therefore be 
ineligible to participate in such options under revised Sec.  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?
    4. Regarding the proposed withdrawal of Sec.  32.12 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 Sec.  32.12 as proposed?
    5. Similarly, and regarding the proposed withdrawal of Sec.  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 Sec.  32.13 as proposed?
    6. 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?
    7. Do the proposals outlined herein omit or fail to appropriately 
consider any other areas of concern regarding agricultural swaps and 
options in any commodity?

VII. Related Matters

A. Cost Benefit Analysis

    Section 15(a) of the CEA \82\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of the rulemaking or to determine 
whether the benefits of the rulemaking outweigh its costs; rather, it 
requires that the Commission ``consider'' the costs and benefits of its 
actions. Section 15(a) further specifies that the costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness and financial integrity of futures markets; 
(3) price discovery; (4) sound risk management practices; and (5) other 
public interest considerations. The

[[Page 6105]]

Commission may in its discretion give greater weight to any one of the 
five enumerated areas and could in its discretion determine that, 
notwithstanding its costs, a particular rule is necessary or 
appropriate to protect the public interest or to effectuate any of the 
provisions or accomplish any of the purposes of the Act.
---------------------------------------------------------------------------

    \82\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    i. Summary of proposed requirements. The proposed rule would 
replace the swap exemption in part 35 and the commodity options 
provisions in part 32 with new rules providing, in general, that 
agricultural swaps and options (other than options on futures) would be 
treated the same as all other swaps. The proposed rule would also amend 
part 33 to remove references to options on physical commodities. While 
the proposed rule does not contain the substantive requirements that 
govern swaps generally (those requirements are found in the swaps-
related rulemakings that implement the Dodd-Frank Act), for purposes of 
this analysis, it is appropriate to consider the costs and benefits of 
treating agricultural swaps and options as all other swaps are treated.
    ii. Costs. With respect to costs, the Commission has determined 
that allowing agricultural swaps to continue to trade under the 
requirements of the current part 35 would result in substantial costs. 
The Dodd-Frank Act added numerous provisions to the CEA to protect 
market participants and the public, such as the segregation of funds 
for uncleared swaps, swap dealer registration and regulation, including 
business conduct standards, and limitations on conflicts of interest. 
Current part 35 exempts qualifying swaps from nearly all sections of 
the CEA, so that these and other protections contained in Dodd-Frank 
would not apply to agricultural swaps entered into under part 35.
    The Dodd-Frank Act contains numerous provisions designed to improve 
price discovery and foster sound risk management practices, such as the 
provisions encouraging the clearing of swaps and trading of swaps on 
DCMs and SEFs. Current part 35, by its terms, would not allow for the 
clearing or trade execution provisions contained in Dodd-Frank.
    Other alternatives to current part 35 could include writing a new 
part that made agricultural swaps subject to some of the provisions 
contained in the Dodd-Frank Act, but not other provisions, or accepting 
all of the provisions of Dodd-Frank and adding additional requirements. 
The costs of either of these alternatives (and of retaining current 
part 35, as well) would be to the efficiency of markets, of swap 
participants, and of the Commission. Since many users of agricultural 
swaps would likely engage in other types of swaps also, those users 
would be subject to two regulatory regimes and the compliance costs 
that would accompany following both regimes. Moreover, the Commission 
would be required to develop and implement two regimes. Also, several 
of those who commented regarding the ANPRM noted that the new Dodd-
Frank Act regulatory regime is robust and comprehensive and provides 
significant protections to market participants, so that any concerns 
regarding agricultural swaps that may have existed under the provisions 
of the CFMA should be allayed. Several commenters noted that 
agricultural swaps are important risk management tools and that such 
swaps should be available on the same terms and conditions as other 
swaps that are used to manage risk.
    With respect to options generally, the Commission has determined 
that retaining the current parts 32 and 33 would have substantial 
costs. As noted above, new CEA Sec.  1a(47) defines swaps to include 
options, other than options on futures. The options rules contained in 
part 32 are a confusing tangle of largely obsolete rules and, even more 
important, the general option rules in parts 32 and 33 do not conform 
to the requirements in the Dodd-Frank Act.
    iii. Benefits. With respect to benefits, the Commission has 
determined that replacing parts 32 and 35 with rules that allow 
agricultural swaps and options to trade under the same terms and 
conditions as other swaps and amending part 33 to delete references to 
options on physical commodities will have substantial benefits.
    Treating agricultural swaps the same as other swaps would subject 
those swaps to the numerous provisions in the Dodd-Frank Act that 
protect market participants and the public, such as the segregation of 
funds for uncleared swaps, limitations on conflicts of interest, and 
swap dealer registration and regulation, including business conduct 
standards. Moreover, the clearing requirement in the Dodd-Frank Act is 
intended to reduce systemic risk which should further protect the 
public.
    The provisions in the Dodd-Frank Act encouraging the clearing of 
swaps and trading of swaps on DCMs and SEFs should improve price 
discovery and foster sound risk management practices. The current 
provisions of part 35 do not permit such clearing or trade execution.
    The Dodd-Frank Act mandates that swap transaction and pricing data 
be made available to the public. The reporting and trade execution 
requirements should lead to greater market and price transparency. 
Also, having a single set of regulations governing all swap 
transactions should improve efficiency and compliance costs for markets 
and market participants.
    With respect to options generally, the Commission has determined 
that replacing part 32 and allowing options (other than options on 
futures) to trade in the same manner as other swaps will have 
substantial benefits similar to those for agricultural swaps discussed 
above. Moreover, the current part 32 is outdated and largely obsolete 
under its own terms. Finally, the current language of parts 32 and 33 
regarding options generally does not comply with the swap provisions of 
the Dodd-Frank Act and must be replaced.
    iv. Conclusion. After considering the section 15(a) factors, the 
Commission has determined that the benefits of the proposed parts 32 
and 35, and the amendments to part 33, outweigh the costs. Accordingly, 
the Commission has determined to propose parts 32 and 35, and the 
amendments to part 33. The Commission invites public comment on its 
cost-benefit considerations. Commenters are also invited to submit any 
data or other information that they may have quantifying or qualifying 
the costs and benefits of the Proposal with their comment letters.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the rules they propose will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis respecting the impact.\83\ 
The proposed rule, in replacing part 35, would affect eligible swap 
participants (``ESPs'') (by eliminating the ESP category and requiring 
agricultural swap participants to be eligible contract participants 
(``ECPs''), unless the transaction occurs on a designated contract 
market (``DCM'')). Regarding options, the proposed rule, in amending 
part 33, would affect entities that currently engage in options on 
physical commodities on a DCM, and, in replacing part 32, would affect 
those entities that currently engage in options under Sec.  32.4 and 
Sec.  32.13(g). By mandating that agricultural swaps and options be 
treated as all other swaps, the effect of the proposed rule has the 
potential to affect DCMs, derivatives

[[Page 6106]]

clearing organizations (``DCOs''), futures commission merchants 
(``FCMs''), large traders and ECPs, as well as swap dealers (``SDs''), 
major swap participants (``MSPs''), commodity pool operators 
(``CPOs''), swap execution facilities (``SEFs''), and swap data 
repositories (``SDRs'').
---------------------------------------------------------------------------

    \83\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

    i. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESPs. The 
Commission has previously determined that DCMs, DCOs, FCMs, CPOs, large 
traders, ECPs, and ESPs are not small entities for purposes of the 
Regulatory Flexibility Act.\84\ Accordingly, the Chairman, on behalf of 
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the 
proposed rules will not have a significant economic impact on a 
substantial number of small entities with respect to these entities.
---------------------------------------------------------------------------

    \84\ See, respectively and as indicated, 47 FR 18618, 18619, 
Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); 66 FR 45604, at 
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).
---------------------------------------------------------------------------

    ii. SDs, MSPs, SEFs, and SDRs. SDs, MSPs, SEFs, and SDRs are new 
categories of registrant under the Dodd-Frank Act. Therefore, the 
Commission has not previously addressed the question of whether SDs, 
MSPs, SEFs, and SDRs are, in fact, ``small entities'' for purposes of 
the RFA. For the reasons that follow, the Commission is hereby 
determining that none of these entities would be small entities. 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed rules, with 
respect to SDs, MSPs, SEFs, and SDRs, will not have a significant 
impact on a substantial number of small entities.
    a. SDs: As noted above, the Commission previously has determined 
that FCMs are not small entities for the purpose of the RFA based upon, 
among other things, the requirements that FCMs meet certain minimum 
financial requirements that enhance the protection of customers' 
segregated funds and protect the financial condition of FCMs 
generally.\85\ SDs similarly will be subject to minimum capital and 
margin requirements, and are expected to comprise the largest global 
financial firms. Entities that engage in a de minimis quantity of swap 
dealing in connection with transactions with or on behalf of its 
customers will be exempted from designation as an SD. For purposes of 
the RFA in this proposed rulemaking, the Commission is hereby 
determining that SDs not be considered to be ``small entities'' for 
essentially the same reasons that FCMs have previously been determined 
not to be small entities.
---------------------------------------------------------------------------

    \85\ 47 FR, at 18619.
---------------------------------------------------------------------------

    b. MSPs: The Commission also has determined that large traders are 
not small entities for the purpose of the RFA.\86\ The Commission 
considered the size of a trader's position to be the only appropriate 
test for purposes of large trader reporting.\87\ MSPs, among other 
things, maintain substantial positions in swaps, creating substantial 
counterparty exposure that could have serious adverse effects on the 
financial stability of the United States banking system or financial 
markets. For purposes of the RFA, the Commission is hereby determining 
that MSPs not be considered to be ``small entities'' for essentially 
the same reasons that large traders have previously been determined not 
to be small entities.
---------------------------------------------------------------------------

    \86\ Id. at 18620.
    \87\ Id.
---------------------------------------------------------------------------

    c. SEFs: The Dodd-Frank Act defines a SEF to mean a trading system 
or platform in which multiple participants have the ability to accept 
bids and offers made by multiple participants in the facility or 
system, through any means of interstate commerce, including any trading 
facility that facilitates the execution of swaps between persons and is 
not a DCM. The Commission previously determined that a DCM is not a 
small entity because, among other things, it may only be designated 
when it meets specific criteria, including expenditure of sufficient 
resources to establish and maintain adequate self-regulatory programs. 
Likewise, the Commission will register an entity as a SEF only after it 
has met specific criteria, including the expenditure of sufficient 
resources to establish and maintain an adequate self-regulatory 
program. Accordingly, as with DCMs, the Commission is hereby 
determining that SEFs are not ``small entities'' for purposes of the 
RFA.
    d. SDRs: The Commission previously determined DCMs and DCOs not to 
be small entities because of ``the central role'' they play in ``the 
regulatory scheme concerning futures trading.'' \88\ Because of the 
``importance of futures trading in the national economy,'' to be 
designated as a contract market or registered as a DCO, the respective 
entity must meet stringent requirements set forth in the CEA.\89\ 
Similarly, swap transactions that are reported and disseminated by SDRs 
are an important part of the national economy. SDRs will receive data 
from market participants and will be obligated to facilitate swaps 
execution by reporting real-time data.\90\ Similar to DCOs and DCMs, 
SDRs will play a central role both in the regulatory scheme covering 
swaps trading and in the overall market for swap transactions. 
Additionally, the Dodd-Frank Act allows DCOs to register as SDRs. 
Accordingly, for essentially the same reasons that DCOs and DCMs have 
previously been determined not to be small entities, the Commission is 
hereby determining that SDRs are not ``small entities'' for purposes of 
the RFA.
---------------------------------------------------------------------------

    \88\ 47 FR at 18619 (DCMs) and 66 FR at 45609 (DCOs).
    \89\ See new CEA section 5(d), as added by section 735(b) of the 
Dodd-Frank Act regarding DCM core principles and new CEA section 
5b(c)(2), as added by section 725(c) of the Dodd-Frank Act regarding 
DCO core principles.
    \90\ See new CEA section 21, as added by section 728 of the 
Dodd-Frank Act.
---------------------------------------------------------------------------

    iii. 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 physical 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 are swaps, other than options on futures. 
New CEA section 2(e) provides that non-ECPs may enter into swaps, if 
the swaps are effected on a DCM. Therefore, even though an option on a 
physical 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 proposed herein, just as they are eligible to 
enter into such options on a DCM under the current part 33. Thus, the 
rule will have no effect on the eligibility of small entities to enter 
into an option on a physical commodity on a DCM. Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that the proposed rules will not have a significant 
economic impact on a substantial number of small entities with respect 
to entities eligible to engage in options on physical commodities on 
DCMs under part 33.
    iv. Entities Engaged in Options under Sec.  32.13(g). The 
Commission has not previously addressed the question of whether 
entities engaged in agricultural trade options under Sec.  32.13(g) 
are, in fact, ``small entities'' for purposes of the RFA. For the 
reasoning that follows, the Commission is hereby determining that 
entities engaged in options under Sec.  32.13(g) would not be small 
entities.
    As noted above, the Commission previously has determined that ECPs 
are

[[Page 6107]]

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 Sec.  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 with an asset owned or liability incurred, or 
reasonably likely to be owned or incurred, by the individual. The 
participation requirements of Sec.  32.13(g)(1) are similar to, if not 
more restrictive than, the analogous ECP provisions.
    For purposes of the RFA in this proposed rulemaking, the Commission 
is hereby determining that entities engaged in options under Sec.  
32.13(g) not be 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 proposed rules, 
with respect to entities engaged in options under Sec.  32.13(g), will 
not have a significant impact on a substantial number of small 
entities.
    v. Entities Engaged in Options under Sec.  32.4. The Commission has 
not previously addressed the question of whether entities engaged in 
trade options under Sec.  32.4 are, in fact, ``small entities'' for 
purposes of the RFA. As noted above, under Sec.  32.4, 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 
Sec.  32.4 trade option exemption does not include any net worth 
requirement.
    Because there is no net worth requirement in Sec.  32.4, thus 
allowing commercial entities of any economic status to effect option 
transactions, the Commission is not in a position to determine whether 
entities engaged in options under Sec.  32.4 include a substantial 
number of small entities on which the proposed rule would have a 
significant economic impact. Therefore, the Commission offers, pursuant 
to 5 U.S.C. 603, the following initial regulatory flexibility analysis, 
which it shall transmit to the Chief Counsel for Advocacy of the Small 
Business Administration as Sec.  603 requires:
     A description of the reasons why action by the agency is 
being considered. The Commission is taking this regulatory action to 
withdraw Sec.  32.4 because the Dodd-Frank Act has defined the term 
``swap'' to include options. This new definition renders Sec.  32.4 
obsolete in its current form.
     A succinct statement of the objectives of, and legal basis 
for, the proposed rule. The objective of the withdrawal of Sec.  32.4 
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 
proposed withdrawal is the new CEA definition of swap, new section 
1a(47)(A)(i), and the agricultural swaps provisions in section 
723(c)(3) of the Dodd-Frank Act.
     A description of and, where feasible, an estimate of the 
number of small entities to which the proposed rule will apply. The 
small entities to which the proposed withdrawal of Sec.  32.4 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, the 
threshold for the definition of small entity in the RFA.\91\ Because 
there are no reporting or registration requirements in Sec.  32.4, it 
is difficult to quantify the exact number of small entities, if any, to 
which the proposed rule may apply.
---------------------------------------------------------------------------

    \91\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

     A description of the projected reporting, recordkeeping, 
and other compliance requirements of the proposed 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 proposed withdrawal of Sec.  
32.4 does not contain 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 Dodd-Frank Act 
in other rulemakings will contain reporting, recordkeeping, and other 
compliance requirements. However, the withdrawal of 32.4 and the 
application of the Dodd-Frank Act swaps rules will limit option 
transactions to eligible contract participants, which have been 
determined not to be small entities. Therefore, any entity that is not 
an ECP will be unable to enter into option transactions except on a 
DCM. Thus, there will be no reporting, recordkeeping or compliance 
requirements applicable to any small entity.
     An identification, to the extent practicable, of all 
relevant Federal rules which may duplicate, overlap or conflict with 
the proposed 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. Accordingly, there will be no rules 
applicable to them that could duplicate, overlap, or conflict with any 
other Federal rules.
     Description of any significant alternatives to the 
proposed rule which accomplish the stated objectives of applicable 
statutes and which minimize any significant economic impact of the 
proposed 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 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 Sec.  32.4 
to ECPs would be to create a special rule to allow non-ECPs to engage 
in such transactions. However, the vast majority of commenters 
responding to the ANPRM, including both agricultural and non-
agricultural interests,\92\ supported treating agricultural swaps the 
same as other swaps, which would entail limiting participation in trade 
options (other than options on a DCM) to ECPs.
---------------------------------------------------------------------------

    \92\ See summary of comments at III B above.
---------------------------------------------------------------------------

    Given these facts, the Commission has determined to treat all trade 
options in the same manner as any other swap and

[[Page 6108]]

thus limit participation to ECPs, unless the swap is transacted on a 
DCM.

C. Paperwork Reduction Act

    Under the Paperwork Reduction Act (PRA),\93\ 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). The Commission 
believes that these proposed rules will not impose any new information 
collection requirements that require approval of OMB under the PRA. The 
Commission notes that these proposed 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.\94\ 
Because the proposals would ultimately result in removing or deleting 
form filing and/or recordkeeping burdens, it will not result in the 
creation of any new information collection subject to OMB review or 
approval under the PRA.
---------------------------------------------------------------------------

    \93\ 44 U.S.C. 3501 et seq.
    \94\ The affected forms include 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.
---------------------------------------------------------------------------

    As a general matter, these proposed rules would allow agricultural 
swaps and options to trade under the same terms and conditions as all 
other swaps and these proposed rules do not, by themselves, impose any 
new information collection requirements. Collections of information 
that may be associated with engaging in agricultural swaps or options 
are, or will be, addressed within each of the general swap-related 
rulemakings implementing the Dodd-Frank Act. The Commission invites 
public comment on the accuracy of its estimate that no additional 
information collection requirements or changes to existing collection 
requirements would result from the rules proposed herein.

VIII. Proposed Rules

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.

17 CFR Part 35

    Commodity futures.

    In consideration of the foregoing and pursuant to the authority 
contained in the Act, as indicated herein, the Commission hereby 
proposes to amend 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, 8, 9, 9a, 12, 12a, 13b, 
13c, 16a, 18, 19, 21, 23.

Sec.  3.13  [Removed and Reserved]

    2. Remove and reserve Sec.  3.13.
    3. Revise part 32 to read as follows:

PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

Sec.
32.1 Scope.
32.2 [Reserved.]
32.3 [Reserved.]
32.4 Commodity option transactions; general authorization.
32.5 [Reserved.]
32.6 [Reserved.]
32.7 [Reserved.]
32.8 Unlawful representations; execution of orders.
32.9 Fraud in connection with commodity option transactions.
32.10 Option transactions entered into prior to the effective date 
of this part.
32.11 [Reserved.]
32.12 [Reserved.]
32.13 [Reserved.]

    Authority: 7 U.S.C. 1a, 2 note, 6c(b), and 6(c), unless 
otherwise noted.

Sec.  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.

Sec.  32.2  [Reserved]

Sec.  32.3  [Reserved]

Sec.  32.4  Commodity option transactions; general authorization.

    Subject to the provisions of this part, 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, subject to all provisions of the Act, including any 
Commission rule, regulation, or order thereunder, otherwise applicable 
to any other swap.

Sec.  32.5  [Reserved]

Sec.  32.6  [Reserved]

Sec.  32.7  [Reserved]

Sec.  32.8  Unlawful representations; execution of orders.

    It shall be unlawful for:
    (a) Any person required to be registered with the Commission in 
accordance with the Act expressly or impliedly to represent that the 
Commission, by declaring effective the registration of such person or 
otherwise, has directly or indirectly approved such person, or any 
commodity option transaction solicited or accepted by such person;
    (b) Any person in or in connection with an offer to enter into, the 
entry into, or the confirmation of the execution of, any commodity 
option transaction expressly or impliedly to represent that compliance 
with the provisions of this part constitutes a guarantee of the 
fulfillment of the commodity option transaction;
    (c) Any person, upon receipt of an order for a commodity option 
transaction, unreasonably to fail to secure prompt execution of such 
order.

Sec.  32.9  Fraud in connection with commodity option transactions.

    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; in or in connection with an offer to enter into, the entry 
into, or the confirmation of the execution of, any commodity option 
transaction.

Sec.  32.10  Option transactions entered into prior to [effective date 
of final rule].

    Nothing contained in this part shall be construed to affect any 
lawful activities that occurred prior to [effective date of final 
rule].

[[Page 6109]]

Sec.  32.11  [Reserved]

Sec.  32.12  [Reserved]

Sec.  32.13  [Reserved]

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 is revised 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, unless otherwise noted.

    5. Revise the part heading to read as set forth above.
    6. In Sec.  33.2, revise paragraph (b) to read as follows:

Sec.  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.
* * * * *

Sec.  33.4  [Amended]

    7. Amend Sec.  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 paragraph (a)(4);
    c. Remove and reserve paragraph (a)(5)(iv);
    d. Remove the words ``or underlying physical'' from paragraph 
(b)(1)(iii); and
    e. Remove the words ``, options on physicals,'' from paragraph 
(d)(3).
    8. Amend Sec.  33.7 as follows:
    a. Revise the second paragraph of the Options Disclosure Statement 
in paragraph (b) introductory text;
    b. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(1) each time it appears;
    c. Remove the phrase ``(e.g., commitment to sell the physical)'' 
from paragraph (b)(1) the first time it appears;
    d. Designate the undesignated paragraphs following paragraph (b)(1) 
as paragraphs (b)(1)(i), (ii), (iii), (iv), and (v), and revise newly 
designated paragraph (b)(1)(v);
    e. Remove the phrase ``or physical commodity'' from paragraph 
(b)(2) introductory text and from paragraph (b)(2)(i);
    f. Designate the undesignated paragraphs following paragraph (b)(3) 
as paragraphs (b)(3)(i), (ii), and (iii);
    g. Designate paragraph (b)(4) as paragraph (b)(4)(i) and the 
undesignated paragraph that follows as paragraph (b)(4)(ii);
    h. Designate paragraph (b)(5) as paragraph (b)(5)(i) and the 
undesignated paragraph that follows as paragraph (b)(5)(ii), and remove 
the phrase ``or underlying physical commodity'' from newly designated 
paragraph (b)(5)(i) both times it appears;
    i. Revise newly designated paragraph (b)(5)(ii);
    j. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(6);
    k. Remove the phrase ``or the physical commodity'' and the phrase 
``or underlying physical commodity'' from paragraph (b)(7)(ii);
    l. Remove and reserve paragraph (b)(7)(iv);
    m. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(7)(v); and
    n. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(7)(x).
    The revisions read as follows:

Sec.  33.7  Disclosure.

* * * * *
    (b) * * *
    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) * * *
    (v) 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) * * *
    (ii) 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.
* * * * *
    9. Revise part 35 to read as follows:

PART 35--SWAPS IN AN AGRICULTURAL COMMODITY (AGRICULTURAL SWAPS)

    Authority: 7 U.S.C. 2 note, 6c(b), and 6(c), unless otherwise 
noted.

Sec.  35.1  Agricultural swaps, generally.

    (a) 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 swap in an agricultural commodity subject to all provisions 
of the Act, including any Commission rule, regulation, or order 
thereunder, otherwise applicable to any other swap; and
    (b) In addition to paragraph (a) of this section, any transaction 
in interstate commerce that is a swap in an agricultural commodity may 
be transacted on a swap execution facility, designated contract market, 
or otherwise in accordance with all provisions of the Act, including 
any Commission rule, regulation, or order thereunder, applicable to any 
other swap eligible to be transacted on a swap execution facility, 
designated contract market, or otherwise.

    Issued in Washington, DC on January 20, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Commodity Options and Agricultural Swaps--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 Dunn, 
Sommers, Chilton and O'Malia voted in the affirmative; no 
Commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the proposed rulemaking to authorize agricultural swap 
and commodity option transactions and subject them to the same rules 
applicable to all other swaps. The Dodd-Frank Act prohibits such 
transactions if the Commission does not specifically authorize them. 
The Commission was informed on this proposal by the public comments 
received in response to an advanced notice of proposed rulemaking 
published in September of last year that addressed agricultural 
swaps. Those comments overwhelmingly supported treating agricultural 
swaps similarly to the treatment of other swaps brought under

[[Page 6110]]

regulation by the Dodd-Frank Act. Agricultural producers, packers, 
processers and handlers will benefit from the ability to use 
agricultural swaps to hedge their risk and also will benefit from 
the transparency brought forth under the Dodd-Frank Act. I believe 
this proposed rulemaking provides an appropriate regulatory 
framework for the transaction of agricultural swaps and commodity 
options, and I look forward to hearing the public's views on this 
matter.

[FR Doc. 2011-1685 Filed 2-2-11; 8:45 am]
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