Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6095 

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. 

2See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov./ 

LawRegulation/OTCDERIVATIVES/index.htm. 

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

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

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

5As 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. 

(1) The meeting will be informal and 

non-adversarial. No individual will be 

subject to cross examination by any 

other participant. FAA representatives 

on the panel may ask questions to 

clarify statements and to ensure an 

accurate record. Any statement made 

during the meeting by a panel member 

should not be construed as an official 

position of the government. 

(2) There will be no admission fees or 

other charges to attend or to participate 

in the public meeting. The meeting will 

be open to all persons, subject to 

availability of space in the meeting 

room. The FAA will make every effort 

to accommodate all persons wishing to 

attend. 

(3) Speakers may be limited to 5–10 

minute statements. 

(4) The meeting will be recorded by 

a court reporter. 

Issued in Fort Worth, Texas on January 27, 

2011. 

Kimberly K. Smith, 

Manager, Rotorcraft Directorate, Aircraft 

Certification Service. 

[FR Doc. 2011–2317 Filed 2–2–11; 8:45 am] 

BILLING CODE 4910–13–P 

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. 

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 DoddFrank 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 § 145.9 

of the Commission’s Regulations.1

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. 

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). 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6096 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

6See 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. 

10When 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). 

12See Agricultural Swaps, 75 FR 59666, Sept. 28, 

2010. 

13Prior 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. 

14Current 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). 

15Current 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. 

16Notably, 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. 

17Note 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. 

19See Dodd-Frank non-agricultural swaps 

discussion, below. 

20See 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 DoddFrank Act grandfathers existing 4(c) exemptions in 

the context of agricultural swaps. 

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. 

In addition to the provisions on swaps 

in an agricultural commodity, the DoddFrank 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

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. 

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

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

Part 35 provides a broad exemption 

for certain swap agreements. As noted, 

part 35 originally applied to swaps in all 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6097 

23Part 35 provides eligible swap participants (as 

defined in § 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 § 35.2. 

24Part 35, at § 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-theCounter Agricultural Swaps and (2) Pursuant to 

Section 4d of the Commodity Exchange Act, 

Permitting Customer Positions in Such ClearedOnly 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. 

25Options on agricultural commodities are 

reviewed in detail in the options discussion of this 

notice. 

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. 

27A designated contract market is a board of trade 

designated as a contract market under CEA section 

5. 

28See new CEA section 2(e) as added by section 

723(a)(2) of the Dodd-Frank Act. 

29The 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. 

31 ‘‘Swap dealer’’ is defined in new CEA section 

1a(49), as added by section 721(a)(21) of the DoddFrank Act. ‘‘Major swap participant’’ is defined in 

new CEA section 1a(33), as added by section 

721(a)(16) of the Dodd-Frank Act. 

32See 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. 

34Part 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. 

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 nonfungibility and counterparty 

creditworthiness requirements), part 35 

is the sole existing authority under 

which market participants may transact 

agricultural swaps that are not 

options.25

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

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. 

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. 

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

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 DoddFrank 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

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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6098 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

35See 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. 

36Section 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). 

37See Commission regulation 32.11, 17 CFR 

32.11. 

38Note 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). 

39 63 FR 18821, Apr. 16, 1998; and 64 FR 68011, 

Dec. 6, 1999, respectively. 

40The 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. 

41The 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. 

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. 

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

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 § 32.13(g)(1). The 

exemption at § 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. 

In either case (whether transacted 

pursuant to the ATOM registration 

scheme or accomplished via the 

exemption at § 32.13(g)), the phrase 

‘‘agricultural trade option’’ refers 

specifically to a trade option on an 

agricultural commodity enumerated in 

§ 32.2. 

In addition to the ATO rules in 

§ 32.13, part 32 includes, at § 32.4, a 

basic trade option exemption applicable 

to options on commodities other than 

the enumerated agricultural 

commodities. The terms of the § 32.4 

exemption are essentially the same as 

those of the § 32.13(g) exemption with 

one significant difference—the § 32.4 

trade option exemption does not 

include any net worth requirement. 

Under § 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 § 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 DoddFrank Act’s general prohibition of 

agricultural swaps. 

iii. Remainder of Part 32 

In addition to the foregoing provisions 

regarding § 32.13 agricultural trade 

options and § 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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6099 

42 In addition, two comments were received that 

did not directly address the ANPRM. 

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). 

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

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 enduser 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, 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6100 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

43See: End User Exception to Mandatory Clearing 

of Swaps, 75 FR 80747, Dec. 23, 2010 (comment 

period closes February 22, 2011). 

44See: 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). 

45See: 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. 

46A 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. 

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. 

48Public Law 102–546 (Oct. 28, 1992). 

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 enduser exception to mandatory clearing of 

swaps pursuant to § 723 of the DoddFrank Act; 43 and (2) further definition 

of certain terms regarding market 

participants, including the terms ‘‘swap 

dealer’’ and ‘‘major swap participant,’’ 

pursuant to § 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. 

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 § 712(d) of the 

Dodd-Frank Act. Any comment 

addressing the distinction between 

swaps and forward contracts will be 

shared with appropriate staff. 

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. 

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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6101 

49While section 4(c) was amended by the DoddFrank Act, for the purposes of this rulemaking its 

function and effect have not changed. See 4(c) 

discussion, below. 

50See 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. 

52Section 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. 

53See footnote 6 above. 

54 40 FR 26504, June 24, 1975. Originally 

designated as 17 CFR 30.01, the provision was redesignated as § 32.9 and incorporated into the 

original part 32 regulations adopted on November 

24, 1976. 

55See discussion and review of original part 32 

below. 

56Exchange-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. 

57See 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. 

59See 47 FR at 57016, Dec. 22, 1982. 

60See 52 FR at 29003, Aug. 5, 1987. 

61See 43 FR 51808, Nov. 24, 1976. 

62See 47 FR at 57016, Dec. 22, 1982. 

63See 52 FR at 29003, Aug. 5, 1987. 

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. 

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 DoddFrank 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

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. 

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 (§ 32.11) 

From a historical perspective, the 

Commission adopted its first broad antifraud 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 § 32.11.57 Upon its 

adoption in 1978, § 32.11 suspended all 

commodity option transactions (except 

for those trade options authorized by 

§ 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 § 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 § 32.11 in 1978. This 

includes the registration requirements 

in § 32.3, the disclosure requirements in 

§ 32.5, the segregation requirements in 

§ 32.6, and the books and recordkeeping 

requirements in § 32.7. 

ii. Original Part 32 (§§ 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 

§§ 32.1–32.10.61

a. 32.1 

The definitions section, § 32.1, has 

been substantively modified only 

once 62 since its adoption in 1976. That 

revision added a scope provision as 

§ 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 § 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, § 32.1 has not been 

substantively amended since its 

adoption in 1976. 

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 § 32.1 has been updated 

and retained in revised part 32 as 

appropriate. The proposal would delete 

the definitions in current § 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, § 32.2(a) 

prohibited commodity options 

transactions on a list of enumerated 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6102 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

64See 57 FR 27925, June 23, 1992. At that time, 

original § 32.2(a) was re-designated as simply 

§ 32.2. 

65 § 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 § 32.4(a). 

66See footnote 26, above. 

67See 43 FR 23704, June 1, 1978. 68See 43 FR 16153, Apr. 17, 1978. 69See 43 FR 47492, Oct. 16, 1978. 70See 43 FR 52467, Nov. 13, 1978. 71September 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 § 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 § 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. 

agricultural commodities and § 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 § 32.2(b),64 and § 32.2 was 

amended again in 1998 to reference the 

Commission’s newly adopted 

Agricultural Trade Option rules in 

§ 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 nonagricultural commodities for the 

purposes of the Commission’s options 

regulations, and thus the Commission is 

proposing to withdraw § 32.2. 

c. 32.3, 32.5, 32.6, and 32.7 

As adopted in 1976, § 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, § 32.6 addressed segregation of 

funds, and § 32.7 set forth the books and 

recordkeeping requirements. Because 

the 1978 suspension of commodity 

options in § 32.11 remains in effect, the 

requirements in §§ 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 § 32.11 suspension (e.g., 

§ 32.4 trade options, § 32.12 dealer 

options, § 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 §§ 32.3, 32.5, 

32.6, and 32.7. 

d. 32.4 

From its adoption, part 32 has 

included, in § 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 DoddFrank 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 § 32.4 imposes no 

minimum net worth requirement on 

participants, both purchasers and sellers 

of commodity options under revised 

§ 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. 

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 §§ 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 § 32.8(a) to all 

Commission registrants, §§ 32.8 and 

32.9 will be retained in substantially the 

same form as they currently exist. The 

retention of §§ 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, §§ 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— 

§§ 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 § 32.11 (recall that the 

§ 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 

§ 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. 

The primary factor in the 

Commission’s determination to 

withdraw § 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 § 32.12. 

That observation, in conjunction with 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6103 

73See 63 FR 18832, Apr. 16, 1998. 

74See 64 FR 68011, Dec. 6, 1999. 

75 In addition, the proposal would withdraw 

§ 3.13 in its entirety. Section 3.13 outlines the 

registration procedures for ATOMs, and will 

become be moot upon the withdrawal of § 32.13. 

76New 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. 

77House Conf. Report No. 102–978, 1992 

U.S.C.C.A.N. 3179, 3213. 

the requirement that to rely on § 32.12 

a dealer has to have been in this 

business as of May 1, 1978, implies that 

no entity is legally relying on § 32.12 for 

any currently transacted business 

activity. The Commission is specifically 

requesting comment as to whether there 

is any reason not to withdraw § 32.12 in 

its entirety, and whether any person, 

group of persons, or class of transactions 

is prejudiced or otherwise harmed by 

such action. 

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 § 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 § 32.4, the Commission is 

proposing to withdraw § 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 § 32.13(g) 

exemption for agricultural trade options. 

Under revised § 32.4, parties need only 

qualify as ECPs, which category would 

include certain persons with a net worth 

of less than $10 million. 

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

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 DoddFrank 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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6104 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

78Section 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. 

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

80New CEA section 2(e), (7 U.S.C. 2(e)). 

81See, for example, new CEA section 5(d) (7 

U.S.C. 7(d)) as added by section 735(b) of the DoddFrank Act and amended CEA section 5c (7 U.S.C. 

7a–2) as amended by section 745 of the Dodd-Frank 

Act. 82 7 U.S.C. 19(a). 

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

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. 

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 selfregulatory 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 DoddFrank 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. 

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 

§ 32.4 trade option exemption, will such 

revisions significantly affect hedging 

opportunities available to currently 

active users of the trade options market? 

In other words, is there any reason not 

to revise § 32.4 as proposed? In 

particular, are there persons who offer 

or purchase trade options on nonenumerated agricultural commodities 

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

§ 32.4 who would not qualify as ECPs 

and would therefore be ineligible to 

participate in such options under 

revised § 32.4? If so, should such 

participants be excepted from the 

general requirement that all swaps 

participants must be ECPs unless the 

transaction takes place on a DCM? 

4. Regarding the proposed withdrawal 

of § 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 § 32.12 as 

proposed? 

5. Similarly, and regarding the 

proposed withdrawal of § 32.13 (the 

agricultural trade option provision) in 

its entirety, would such action (in 

conjunction with the adoption of the 

new rules proposed herein) prejudice or 

otherwise harm any person, group of 

persons, or class of transactions? In 

other words, is there any reason not to 

withdraw § 32.13 as proposed? 

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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6105 

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

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. 

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 DoddFrank Act, but not other provisions, or 

accepting all of the provisions of DoddFrank 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 § 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 § 32.4 and § 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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6106 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

84See, 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). 

85 47 FR, at 18619. 

86 Id. at 18620. 

87 Id. 

88 47 FR at 18619 (DCMs) and 66 FR at 45609 

(DCOs). 

89See 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. 

90See new CEA section 21, as added by section 

728 of the Dodd-Frank Act. 

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’’). 

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. 

ii. SDs, MSPs, SEFs, and SDRs. SDs, 

MSPs, SEFs, and SDRs are new 

categories of registrant under the DoddFrank 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. 

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. 

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 selfregulatory 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. 

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 DoddFrank 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 

§ 32.13(g). The Commission has not 

previously addressed the question of 

whether entities engaged in agricultural 

trade options under § 32.13(g) are, in 

fact, ‘‘small entities’’ for purposes of the 

RFA. For the reasoning that follows, the 

Commission is hereby determining that 

entities engaged in options under 

§ 32.13(g) would not be small entities. 

As noted above, the Commission 

previously has determined that ECPs are 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6107 

91 5 U.S.C. 601(6). 92See summary of comments at III B above. 

not small entities for the purpose of the 

RFA based upon, among other things, 

the financial and institutional 

requirements contained in the 

definition. Also as noted above, the 

exemption at § 32.13(g) allows for 

options on the enumerated agricultural 

commodities to be sold when: (1) The 

option is offered to a commercial (‘‘a 

producer, processor, or commercial user 

of, or a merchant handling’’ the 

underlying commodity); (2) the 

commercial enters the transaction solely 

for purposes related to its business as 

such; and (3) each party to the option 

contract has a net worth of not less than 

$10 million. There are two analogous 

provisions in the ECP definition, new 

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

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

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

includes a corporation, partnership, 

proprietorship, organization, trust, or 

other entity that has a net worth 

exceeding $1,000,000 and enters into a 

swap in connection with the entity’s 

business or to manage the risk 

associated with an asset or liability 

owned or incurred or reasonably likely 

to be owned or incurred by the entity in 

the conduct of the entity’s business. 

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

provides that an ECP includes an 

individual who has assets invested on a 

discretionary basis, the aggregate of 

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

who enters the swap in order to manage 

the risk associated with an asset owned 

or liability incurred, or reasonably likely 

to be owned or incurred, by the 

individual. The participation 

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

to, if not more restrictive than, the 

analogous ECP provisions. 

For purposes of the RFA in this 

proposed rulemaking, the Commission 

is hereby determining that entities 

engaged in options under § 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 § 32.13(g), will not have a 

significant impact on a substantial 

number of small entities. 

v. Entities Engaged in Options under 

§ 32.4. The Commission has not 

previously addressed the question of 

whether entities engaged in trade 

options under § 32.4 are, in fact, ‘‘small 

entities’’ for purposes of the RFA. As 

noted above, under § 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 § 32.4 trade 

option exemption does not include any 

net worth requirement. 

Because there is no net worth 

requirement in § 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 § 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 § 603 requires: 

• A description of the reasons why 

action by the agency is being 

considered. The Commission is taking 

this regulatory action to withdraw § 32.4 

because the Dodd-Frank Act has defined 

the term ‘‘swap’’ to include options. This 

new definition renders § 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 § 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 

§ 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 § 32.4, it is 

difficult to quantify the exact number of 

small entities, if any, to which the 

proposed rule may apply. 

• 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 § 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 DoddFrank 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 § 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. 

Given these facts, the Commission has 

determined to treat all trade options in 

the same manner as any other swap and 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6108 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

93 44 U.S.C. 3501 et seq. 

94The 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. 

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. 

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. 

§ 3.13 [Removed and Reserved] 

2. Remove and reserve § 3.13. 

3. Revise part 32 to read as follows: 

PART 32—REGULATION OF 

COMMODITY OPTION TRANSACTIONS 

Sec. 

32.1 Scope. 

32.2 [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. 

§ 32.1 Scope. 

The provisions of this part shall apply 

to all commodity option transactions, 

except for commodity option 

transactions on a contract of sale of a 

commodity for future delivery 

conducted or executed on or subject to 

the rules of either a designated contract 

market or a foreign board of trade. 

§ 32.2 [Reserved] 

§ 32.3 [Reserved] 

§ 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. 

§ 32.5 [Reserved] 

§ 32.6 [Reserved] 

§ 32.7 [Reserved] 

§ 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. 

§ 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. 

§ 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]. 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 6109 

§ 32.11 [Reserved] 

§ 32.12 [Reserved] 

§ 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 § 33.2, revise paragraph (b) to 

read as follows: 

§ 33.2 Applicability of Act and rules; scope 

of part 33. 

* * * * * 

(b) The provisions of this part apply 

to commodity option transactions that 

are options on contracts of sale of a 

commodity for future delivery except 

for commodity option transactions that 

are options on contracts of sale of a 

commodity for future delivery 

conducted or executed on or subject to 

the rules of a foreign board of trade. 

* * * * * 

§ 33.4 [Amended] 

7. Amend § 33.4 as follows: 

a. Remove the words ‘‘or for options 

on physicals in any commodity 

regulated under the Act,’’ in the 

introductory text; 

b. Remove and reserve 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 § 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: 

§ 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. 

§ 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 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1
6110 Federal Register / Vol. 76, No. 23 / Thursday, February 3, 2011 / Proposed Rules 

1See Section 1503(f) of the Act. 

2See, e.g., National Mining Association (January 

3, 2011); National Stone, Sand & Gravel Association 

(January 13, 2011); and World Gold Council 

(January 7, 2011). Comments are available on the 

Commission’s Internet Web site at http:// 

www.sec.gov/comments/s7-41-10/s74110.shtml. 

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] 

BILLING CODE P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229, 239 and 249 

[Release Nos. 33–9179; 34–63794; File No. 

S7–41–10] 

RIN 3235–AK83 

Mine Safety Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule; extension of 

comment period. 

SUMMARY: The Securities and Exchange 

Commission is extending the comment 

period for a release proposing 

amendments to its rules to implement 

Section 1503 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act. [Release No. 33–9164; 75 FR 80374 

(December 22, 2010)]. The original 

comment period for Release No. 33– 

9164 is scheduled to end on January 31, 

2011. The Commission is extending the 

time period in which to provide the 

Commission with comments on that 

release for 30 days until Wednesday, 

March 2, 2011. This action will allow 

interested persons additional time to 

analyze the issues and prepare their 

comments. 

DATES: Comments should be received on 

or before March 2, 2011. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–41–10 on the subject line; 

or 

• Use the Federal Rulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–41–10. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 

10 a.m. and 3 p.m. All comments 

received will be posted without change; 

we do not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Jennifer Zepralka, Senior Special 

Counsel, or Jennifer Riegel, AttorneyAdvisor, Division of Corporation 

Finance at (202) 551–3300, at the U.S. 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: The 

Commission has requested comment on 

a release proposing amendments to its 

rules to implement Section 1503 of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act (the ‘‘Act’’). 

Section 1503(a) of the Act requires 

issuers that are operators, or that have 

a subsidiary that is an operator, of a coal 

or other mine to disclose in their 

periodic reports filed with the 

Commission information regarding 

specified health and safety violations, 

orders and citations, related assessments 

and legal actions, and mining-related 

fatalities. Section 1503(b) of the Act 

mandates the filing of a Form 8–K 

disclosing the receipt of certain orders 

and notices from the Mine Safety and 

Health Administration. The disclosure 

requirements set forth in the Act are 

currently in effect,1 but the Commission 

is proposing to amend its rules to 

implement and specify the scope and 

application of the disclosure 

requirements set forth in the Act and to 

require a limited amount of additional 

disclosure to provide context for certain 

items required by the Act. This release 

was published in the Federal Register 

on December 22, 2010. 

The Commission originally requested 

that comments on the release be 

received by January 31, 2011. The 

nature of the proposed disclosure 

requirements differs from the disclosure 

traditionally required by the Securities 

Exchange Act of 1934, and the proposal 

requested comment on a variety of 

significant aspects of the proposed 

rules. The Commission has received 

requests for an extension of time for 

public comment on the proposal to, 

among other things, allow for the 

collection of information and improve 

the quality of responses.2 The 

Commission believes that providing the 

public additional time to consider 

thoroughly the matters addressed by the 

release and to submit comprehensive 

comments to the release would benefit 

the Commission in its consideration of 

final rules. Therefore, the Commission 

is extending the comment period for 

Release No. 33–9164 ‘‘Mine Safety 

Disclosure’’ for 30 days, to Wednesday, 

March 2, 2011. 

By the Commission. 

Dated: January 28, 2011. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2011–2373 Filed 2–2–11; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 229 and 249 

[Release No. 34–63793; File No. S7–40–10] 

RIN 3235–AK84 

Conflict Minerals 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule; extension of 

comment period. 

SUMMARY: The Securities and Exchange 

Commission is extending the comment 

period for a release proposing 

amendments to its rules to implement 

Section 1502 of the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act. [Release No. 34–63547; 75 FR 

80948 (December 23, 2010)]. The 

original comment period for Release No. 

34–63547 is scheduled to end on 

January 31, 2011. The Commission is 

extending the time period in which to 

provide the Commission with comments 

on that release for 30 days until 

Wednesday, March 2, 2011. This action 

will allow interested persons additional 


jdjones on DSK8KYBLC1PROD with PROPOSALS-1