Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 28239 

notified of the Council’s intent to take 

final action to address the emergency. 

Special Accommodations 

This meeting is physically accessible 

to people with disabilities. Requests for 

sign language interpretation or other 

auxiliary aids should be directed to 

Thomas A. Nies, Executive Director, at 

(978) 465–0492, at least 5 days prior to 

the meeting date. 

Authority: 16 U.S.C. 1801 et seq. 

Dated: May 13, 2015. 

Tracey L. Thompson, 

Acting Deputy Director, Office of Sustainable 

Fisheries, National Marine Fisheries Service. 

[FR Doc. 2015–11949 Filed 5–15–15; 8:45 am] 

BILLING CODE 3510–22–P 

DEPARTMENT OF COMMERCE 

National Oceanic and Atmospheric 

Administration 

Fisheries of the South Atlantic; South 

Atlantic Fishery Management Council; 

Public Meeting 

AGENCY: National Marine Fisheries 

Service (NMFS), National Oceanic and 

Atmospheric Administration, NOAA, 

Commerce. 

ACTION: Notice of a public meeting. 

SUMMARY: The SAFMC will hold a 

meeting of its Scientific and Statistical 

Committee (SSC) to review stock 

projections for blueline tilefish. See 

SUPPLEMENTARY INFORMATION. 

DATES: The SSC meeting will be held via 

webinar on Wednesday, June 3, 2015, 

from 1 p.m. to 3 p.m. 

ADDRESSES: The meeting will be held 

via webinar. The webinar is open to 

members of the public. Those interested 

in participating should contact John 

Carmichael at the SAFMC (see FOR

FURTHER INFORMATION CONTACT) to 

request an invitation providing webinar 

access information. Please request 

webinar invitations at least 24 hours in 

advance of the webinar. 

Council address: South Atlantic 

Fishery Management Council, 4055 

Faber Place Drive, Suite 201, N. 

Charleston, SC 29405. 

FOR FURTHER INFORMATION CONTACT: John 

Carmichael; 4055 Faber Place Drive, 

Suite 201, North Charleston, SC 29405; 

phone: (843) 571–4366 or toll free (866) 

SAFMC–10; fax: (843) 769–4520; email: 

john.carmichael@safmc.net. 

SUPPLEMENTARY INFORMATION: This 

meeting is held to discuss yield and 

stock status projections for blueline 

tilefish. This SSC reviewed the SEDAR 

32 blueline tilefish stock assessment in 

October 2013, and considered revised 

projections in April 2014. The Council 

has directed the SSC to review the most 

recent stock projections and consider if 

they still provide an adequate basis to 

support the fishery management 

program. 

Items to be addressed during this 

meeting. 

Blueline Tilefish Stock Projections 

Special Accommodations 

The meeting is physically accessible 

to people with disabilities. Requests for 

sign language interpretation or other 

auxiliary aids should be directed to the 

Council office (see ADDRESSES) at least 

10 business days prior to the meeting. 

Note: The times and sequence 

specified in this agenda are subject to 

change. 

Authority: 16 U.S.C. 1801 et seq. 

Dated: May 13, 2015. 

Tracey L. Thompson, 

Acting Deputy Director, Office of Sustainable 

Fisheries, National Marine Fisheries Service. 

[FR Doc. 2015–11951 Filed 5–15–15; 8:45 am] 

BILLING CODE 3510–22–P 

DEPARTMENT OF COMMERCE 

National Oceanic and Atmospheric 

Administration 

Western Pacific Fishery Management 

Council; Public Meetings 

AGENCY: National Marine Fisheries 

Service (NMFS), National Oceanic and 

Atmospheric Administration (NOAA), 

Commerce. 

ACTION: Notice of public meetings. 

SUMMARY: The Western Pacific Fishery 

Management Council (Council) will 

convene a meeting of the Risk of 

Overfishing (denoted by P*) Working 

Group (P* WG) for the Main Hawaiian 

Island Deep 7 Bottomfish Fishery. The 

P* WG will finalize the scores for the 

different P* dimensions and criteria, 

from the last working group meeting 

and recommend an appropriate risk of 

overfishing levels. This will be the basis 

for the specification of Acceptable 

Biological Catch (ABC) levels for the 

Scientific and Statistical Committee 

(SSC) to consider. 

DATES: The P* WG meeting will be on 

June 4, 2015. For specific times and 

agendas, see SUPPLEMENTARY

INFORMATION. 

ADDRESSES: The P* WG meeting will be 

held at the Council office, 1164 Bishop 

Street, Suite 1400, Honolulu, HI 96813; 

telephone: (808) 522–8220. 

FOR FURTHER INFORMATION CONTACT: 

Kitty M. Simonds, Executive Director; 

telephone: (808) 522–8220. 

SUPPLEMENTARY INFORMATION: Public 

comment periods will be provided. The 

order in which agenda items are 

addressed may change. The meetings 

will run as late as necessary to complete 

scheduled business. 

Schedule and Agenda for the P* WG 

Meeting 

June 4, 2015—1 p.m.–5 p.m. 

1. Introductions 

2. Recap of previous meeting 

3. Review of the P* Dimensions and 

Criteria 

a. Assessment information 

b. Uncertainty characterization 

c. Stock status 

d. Productivity and susceptibility 

4. Revisit Productivity and 

Susceptibility scores 

5. Finalizing the P* scores 

6. Scoping discussion on changes to the 

P* dimensions and criteria 

7. General Discussion 

8. Public comment 

9. Summary of scores and P* 

recommendations 

Special Accommodations 

The meeting is physically accessible 

to people with disabilities. Requests for 

sign language interpretation or other 

auxiliary aids should be directed to 

Kitty M. Simonds, (808) 522–8220 

(voice) or (808) 522–8226 (fax), at least 

5 days prior to the meeting date. 

Authority: 16 U.S.C. 1801 et seq. 

Dated: May 13, 2015. 

Tracey L. Thompson, 

Acting Deputy Director, Office of Sustainable 

Fisheries, National Marine Fisheries Service. 

[FR Doc. 2015–11954 Filed 5–15–15; 8:45 am] 

BILLING CODE 3510–22–P 

COMMODITY FUTURES TRADING 

COMMISSION 

RIN 3038–AE24 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–74936; File No. S7–16–11] 

RIN 3235–AK65 

Forward Contracts With Embedded 

Volumetric Optionality 

AGENCY: Commodity Futures Trading 

Commission; Securities and Exchange 

Commission. 

ACTION: Final interpretation. 

SUMMARY: In accordance with section 

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


asabaliauskas on DSK5VPTVN1PROD with NOTICES
28240 Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 

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

described in the Products Release, the 

interpretation included the following seven 

elements: 

1. The embedded optionality does not undermine 

the overall nature of the agreement, contract, or 

transaction as a forward contract; 

2. The predominant feature of the agreement, 

contract, or transaction is actual delivery; 

3. The embedded optionality cannot be severed 

and marketed separately from the overall 

agreement, contract, or transaction in which it is 

embedded; 

4. The seller of a nonfinancial commodity 

underlying the agreement, contract, or transaction 

with embedded volumetric optionality intends, at 

the time it enters into the agreement, contract, or 

transaction to deliver the underlying nonfinancial 

commodity if the optionality is exercised; 

5. The buyer of a nonfinancial commodity 

underlying the agreement, contract or transaction 

with embedded volumetric optionality intends, at 

the time it enters into the agreement, contract, or 

transaction, to take delivery of the underlying 

nonfinancial commodity if it exercises the 

embedded volumetric optionality; 

6. Both parties are commercial parties; and 

7. The exercise or non-exercise of the embedded 

volumetric optionality is based primarily on 

physical factors, or regulatory requirements, that are 

outside the control of the parties and are 

influencing demand for, or supply of, the 

nonfinancial commodity. 

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

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

commodity or security for deferred shipment or 

delivery, so long as the transaction is intended to 

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

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

commodity for deferred shipment or delivery’’) 

(emphasis added). 

3See 77 FR at 48238–42 & n.335. As explained 

in the Products Release, the CFTC interprets the 

exclusions in CEA sections 1a(47)(B)(ii) and 1a(27) 

as coextensive and thus requiring a consistent 

interpretation. See id. at 48227–8. See also id. at 

48227–36 (discussing the CFTC’s interpretation 

regarding the forward contract exclusion for 

nonfinancial commodities). 

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

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

2010), and Characteristics Distinguishing Cash and 

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

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

Interpretation’’)). 

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

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

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

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

CEA section 1a(47)(A)(i) does not differentiate 

between financially- and physically-settled options. 

Certain physically-settled options, termed ‘‘trade 

options,’’ are nevertheless exempt from most 

requirements applicable to swaps. See 17 CFR 32.3. 

Additionally, the CFTC is proposing to amend its 

trade option exemption to further reduce the 

reporting and recordkeeping requirements 

applicable to certain commercial end users. See 

Trade Options, 80 FR 26200 (May 7, 2015). 

6The Products Release included a request for 

comment on the CFTC’s interpretation regarding 

forward contracts with embedded volumetric 

optionality. See 77 FR at 48241–42. CFTC staff also 

solicited comments in connection with a public 

roundtable on issues concerning end users and the 

Dodd-Frank Act. These comments are available at 

http://comments.cftc.gov/PublicComments/

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

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1485, respectively. In 

general, commenters asserted that uncertainty with 

regard to the CFTC’s interpretation, particularly the 

seventh element, has led to confusion over whether 

to characterize certain transactions as excluded 

forward contracts with embedded volumetric 

optionality or regulated trade options. 

7 Forward Contracts With Embedded Volumetric 

Optionality, 79 FR 69073 (Nov. 20, 2014) (the 

‘‘Proposed Interpretation’’). Section 712(d)(4) of the 

Dodd-Frank Act provides that ‘‘[a]ny interpretation 

of, or guidance by either Commission regarding, a 

provision of this title, shall be effective only if 

issued jointly by the Commodity Futures Trading 

Commission and the Securities and Exchange 

Commission, after consultation with the Board of 

Governors, if this title requires the Commodity 

Futures Trading Commission and the Securities and 

Exchange Commission to issue joint regulations to 

implement the provision.’’ While the Dodd-Frank 

Act requires this interpretation, which was 

originally included in the Products Release, to be 

issued jointly by the CFTC and the SEC, it is an 

interpretation solely of the CFTC and does not 

apply to the exclusion from the swap and securitybased swap definitions for security forwards or to 

the distinction between security forwards and 

security futures products. 

8 Id. at 69074. 

9 Id. at 69074–76. 

10See id. at 69076. The CFTC also requested 

comment in response to specific questions relating 

to its proposal. Id. The comment file, which 

includes 22 unique comments and one (1) ex parte 

communication, is available at http://

comments.cftc.gov/PublicComments/

CommentList.aspx?id=1541. Commenters include 

American Gas Association; American Petroleum 

Institute; American Public Power Association, 

Edison Electric Institute, Electric Power Supply 

Association, Large Public Power Council, and 

National Rural Electric Cooperative Association; 

Americans for Financial Reform; Barnard, Chris; 

Better Markets Inc.; Business Council for 

Sustainable Energy; Coalition for Derivatives EndUsers; Coalition of Physical Energy Companies; 

Cogen Technologies Linden Venture LP; 

Commercial Energy Working Group and 

Commodity Markets Council; Dairy Farmers of 

America; EDF Trading North America LLC; Federal 

Energy Regulatory Commission staff; Fig, Willem; 

International Energy Credit Association; 

International Swaps and Derivatives Association 

Inc.; National Association of Manufacturers; 

National Corn Growers Association and Natural Gas 

Supply Association; National Energy Marketers 

Association; Public Citizen; and Southern Company 

Services Inc., acting on behalf of and as agent for 

Alabama Power Co., Georgia Power Co., Gulf Power 

Co., Mississippi Power Co., and Southern Power Co. 

None of the commenters requested any revisions to 

SEC rules or regulations (or interpretations thereof), 

but rather addressed issues relating solely to the 

CFTC’s interpretation. 

Reform and Consumer Protection Act 

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

Futures Trading Commission (the 

‘‘CFTC’’) and the Securities and 

Exchange Commission (‘‘SEC’’), after 

consultation with the Board of 

Governors of the Federal Reserve 

System (‘‘Board of Governors’’), are 

jointly issuing the CFTC’s clarification 

of its interpretation concerning forward 

contracts with embedded volumetric 

optionality. 

DATES: This interpretation is effective on 

May 18, 2015. 

FOR FURTHER INFORMATION CONTACT: 

CFTC: Elise Pallais, Counsel, (202) 418– 

5577, epallais@cftc.gov; Mark Fajfar, 

Assistant General Counsel, (202) 418– 

6636, mfajfar@cftc.gov, Office of the 

General Counsel, Commodity Futures 

Trading Commission, 1155 21st Street 

NW., Washington, DC 20581. SEC: Carol 

McGee, Assistant Director, (202) 551– 

5870, mcgeec@sec.gov, Office of 

Derivatives Policy, Division of Trading 

and Markets, Securities and Exchange 

Commission, 100 F Street NE., 

Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

In Further Definition of ‘‘Swap,’’ 

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

Security-Based Swap Agreement 

Recordkeeping (the ‘‘Products Release’’), 

the CFTC provided an interpretation, in 

response to requests from commenters, 

with respect to forward contracts that 

provide for variations in delivery 

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

volumetric optionality’’).1 Specifically, 

the CFTC identified when an agreement, 

contract, or transaction would fall 

within the forward contract exclusion 

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

definitions in the Commodity Exchange 

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

it contains embedded volumetric 

optionality.3 In providing its 

interpretation, the CFTC was guided by 

and sought to reconcile agency 

precedent regarding forward contracts 

containing embedded options 4 with the 

statutory definition of ‘‘swap’’ in section 

1a(47) of the CEA, which provides, 

among other things, that commodity 

options are swaps, even if physically 

settled.5

In response to requests from market 

participants,6 the CFTC proposed in 

November 2014 to clarify its 

interpretation of when an agreement, 

contract, or transaction with embedded 

volumetric optionality would be 

considered a forward contract.7 In 

particular, the CFTC proposed to (a) 

modify the fourth and fifth elements of 

its interpretation to clarify that the 

interpretation applies to embedded 

volumetric optionality in the form of 

both puts and calls 8 and (b) modify the 

seventh element to clarify that the 

embedded volumetric optionality must 

be primarily intended, at the time the 

parties enter into the agreement, 

contract, or transaction, to address 

physical factors or regulatory 

requirements that reasonably influence 

demand for, or supply of, the 

nonfinancial commodity.9 The CFTC 

requested comment on all aspects of its 

proposal.10


asabaliauskas on DSK5VPTVN1PROD with NOTICES
Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 28241 

11See 77 FR at 48238. 

12As described in the Products Release, the fifth 

element did not appear to contemplate 

circumstances where the seller of the nonfinancial 

commodity might exercise the embedded 

volumetric optionality. See 77 FR at 48238 (‘‘The 

buyer of a nonfinancial commodity underlying the 

agreement, contract or transaction with embedded 

volumetric optionality intends, at the time it enters 

into the agreement, contract, or transaction, to take 

delivery of the underlying nonfinancial commodity 

if it exercises the embedded volumetric 

optionality.’’) (emphasis added). 

13See 77 FR at 48238–39. 

14See id. at 48227–36. 

15The CFTC’s interpretation only addresses when 

a forward contract with embedded volumetric 

optionality would be excluded from the swap or 

future delivery definitions in the CEA; it does not 

address whether a contract would otherwise fall 

within the swap definition. In other words, a 

contract that does not meet one or more elements 

of the CFTC’s interpretation may or may not be a 

swap depending on the characteristics of the 

contract. See, e.g., id. at 48246–52 (discussing 

application of the swap definition to consumer and 

commercial agreements). 

16See, e.g., id. at 48228. 

17See Letter from Coalition of Physical Energy 

Companies (Dec. 22, 2014) at 4; Letter from 

Commercial Energy Working Group and 

Commodity Markets Council (Dec. 22, 2014) at 3– 

4; Letter from EDF Trading North America LLC 

(‘‘EDFTNA’’) (Dec. 22, 2014) at 15–17; Letter from 

International Energy Credit Association (‘‘IECA’’) 

(Dec. 22, 2014) at 4–5; Letter from International 

Swaps and Derivatives Association Inc. (Dec. 22, 

2014) at 3 (each requesting clarification that the 

fourth and fifth elements permit both increases and 

decreases in volume). 

18See 77 FR at 48239 (‘‘The fourth and fifth 

elements are designed to ensure that both parties 

intend to make or take delivery (as applicable), 

subject to the relevant physical factors or regulatory 

requirements, which may lead the parties to deliver 

more or less than originally intended.’’) (emphasis 

added). 

19See 79 FR at 69074–75. 

20See, e.g., Letter from the Commodity Markets 

Council, the National Corn Growers Association, 

and the Natural Gas Supply Association (‘‘CMC/

NCGA/NGA’’) (April 17, 2014) at 2 (‘‘Physical endusers need these contracts to address supply input 

or production output uncertainty associated with 

the operation of a physical business.’’); Letter from 

the Plains All American Pipeline, L.P. (April 17, 

2014) at 2 (‘‘Such contracts provide us with the 

ability to allow our customers flexibility to increase 

or decrease the amount of purchase or sale of a 

commodity in response to prevailing market 

conditions.’’). 

21See 77 FR 48228 (describing a forward contract 

as a ‘‘commercial merchandising transaction’’ in 

which delivery is delayed for ‘‘commercial 

convenience or necessity’’). 

22See 77 FR at 48228 (‘‘The primary purpose of 

a forward contract is to transfer ownership of the 

Continued 

II. Overview 

After a careful review of the 

comments received, the CFTC has 

determined to finalize its interpretation 

as proposed with some additional 

clarifications. Accordingly, an 

agreement, contract, or transaction falls 

within the forward exclusion from the 

swap and future delivery definitions, 

notwithstanding that it contains 

embedded volumetric optionality, 

when: 

1. The embedded optionality does not 

undermine the overall nature of the 

agreement, contract, or transaction as a 

forward contract; 

2. The predominant feature of the 

agreement, contract, or transaction is 

actual delivery; 

3. The embedded optionality cannot 

be severed and marketed separately 

from the overall agreement, contract, or 

transaction in which it is embedded; 

4. The seller of a nonfinancial 

commodity underlying the agreement, 

contract, or transaction with embedded 

volumetric optionality intends, at the 

time it enters into the agreement, 

contract, or transaction to deliver the 

underlying nonfinancial commodity if 

the embedded volumetric optionality is 

exercised; 

5. The buyer of a nonfinancial 

commodity underlying the agreement, 

contract or transaction with embedded 

volumetric optionality intends, at the 

time it enters into the agreement, 

contract, or transaction, to take delivery 

of the underlying nonfinancial 

commodity if the embedded volumetric 

optionality is exercised; 

6. Both parties are commercial parties; 

and 

7. The embedded volumetric 

optionality is primarily intended, at the 

time that the parties enter into the 

agreement, contract, or transaction, to 

address physical factors or regulatory 

requirements that reasonably influence 

demand for, or supply of, the 

nonfinancial commodity. 

As stated in the Proposed 

Interpretation, the first six elements of 

this interpretation are largely 

unchanged from the Products Release.11

Among them, only the fourth and fifth 

elements have been modified, as 

proposed, to clarify that the CFTC’s 

interpretation applies to embedded 

volumetric optionality in the form of 

both puts and calls.12 Accordingly, the 

CFTC’s discussion of these six elements 

in the Products Release remains relevant 

and applicable.13 The seventh element 

of the interpretation is discussed further 

below. 

As a general matter, the CFTC clarifies 

that its interpretation with respect to 

forward contracts with embedded 

volumetric optionality should not be 

read to alter or expand the historic 

interpretation of the forward contract 

exclusion. As the first two elements 

affirm, the interpretation presupposes 

the existence of an underlying forward 

contract, as determined by applying the 

historic interpretation of the forward 

contract exclusion.14 The CFTC’s 

interpretation, as provided herein, 

merely identifies the circumstances 

under which volumetric optionality 

embedded in such a forward contract 

would not operate to take the contract 

outside the forward contract 

exclusion.15 As explained in the 

Products Release, the historic 

interpretation of the forward contract 

exclusion remains relevant and 

applicable.16

In response to commenters, the CFTC 

clarifies that the fourth and fifth 

elements of the interpretation do not 

preclude bandwidth (a.k.a. ‘‘swing’’) 

contracts, which provide for delivery of 

a nonfinancial commodity within a 

certain minimum and maximum range, 

from falling within the forward contract 

exclusion from the swap and future 

delivery definitions.17 As indicated in 

the Products Release, the fourth and 

fifth elements merely require that the 

intent to make or take delivery (as 

applicable) required of the underlying 

forward contract extends to the 

embedded volumetric optionality, such 

that both parties to the contract intend 

to make or take delivery (as applicable) 

of the nonfinancial commodity under 

the contract if the embedded volumetric 

optionality is exercised.18 The 

embedded volumetric optionality may 

therefore operate to increase and/or 

decrease the quantity delivered under 

the underlying forward contract and 

still not take the contract out of the 

forward exclusion provided that all 

elements of the CFTC’s interpretation, 

as provided herein, are satisfied. 

III. The Seventh Element 

As stated in the Proposed 

Interpretation, the seventh element 

addresses the primary reason for 

including embedded volumetric 

optionality in a forward contract.19

Embedded volumetric optionality offers 

commercial parties the flexibility to 

vary the amount of the nonfinancial 

commodity delivered during the life of 

the contract in response to uncertainty 

in the demand for or supply of the 

nonfinancial commodity.20 The seventh 

element ensures that this purpose, 

consistent with the historical 

interpretation of a forward contract,21 is 

the primary purpose for including 

embedded volumetric optionality in the 

contract. In other words, the embedded 

volumetric optionality must primarily 

be intended as a means of assuring a 

supply source or providing delivery 

flexibility in the face of uncertainty 

regarding the quantity of the 

nonfinancial commodity that may be 

needed or produced in the future, 

consistent with the purposes of a 

forward contract.22


asabaliauskas on DSK5VPTVN1PROD with NOTICES
28242 Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 

commodity and not to transfer solely its price 

risk.’’). See also Letter from the CMC/NCGA/NGA 

(April 17, 2014) at 2 (‘‘[Contracts with volumetric 

optionality] exist to permit end-users to have 

agreements in place so that they can effectively and 

economically manage the purchase or sale of 

commodities related to their commercial 

businesses, not as a substitute for a financially 

settled contract or for speculative purposes.’’); 

Letter from ONEOK, Inc. (July 22, 2011) at 7 (stating 

that ‘‘[a]lthough the amounts that can be taken on 

delivery may vary, the primary intent of the 

contracts is not to provide price protection’’). 

23For example, in choosing whether to obtain 

additional supply by exercising the embedded 

volumetric optionality under a given contract or 

turning to another supply source—whether storage, 

the spot market, or another forward contract with 

embedded volumetric optionality—commercial 

parties would be able to consider a variety of 

factors, including price, provided that the intended 

purpose for including the embedded volumetric 

optionality in the contract at contract initiation was 

to address physical factors or regulatory 

requirements influencing the demand for or supply 

of the commodity. See also Letter from EDFTNA 

(Dec. 22, 2014) at 20 (requesting further clarification 

that the seventh element only addresses the intent 

of the party with the right to exercise the embedded 

volumetric optionality.) 

24See 77 FR 48228 (‘‘In assessing the parties’ 

expectations or intent regarding delivery, the CFTC 

consistently has applied a ‘facts and circumstances’ 

test.’’). For example, if one party has an option to 

settle a contract financially based upon a value 

change in an underlying cash market, then the 

contract may be a swap. See id. at 48241 n. 370. 

See also Letter from ONEOK, Inc. (July 22, 2011) 

at 6 (acknowledging that ‘‘[t]he intent of the parties 

to defer delivery of a varying amount can be 

ascertained based on objective criteria, such as the 

pattern of deliveries in relation to variation in 

weather, customer demand, or other similar 

factors.’’). 

25See Letter from EDFTNA (Dec. 22, 2014) at 22– 

23 (arguing that requiring counterparties to conduct 

due diligence in order to ensure that facts 

suggesting an alternate purpose for the embedded 

volumetric optionality are not present would be 

‘‘infeasible’’ and may undercut the utility of the 

Proposed Interpretation). 

26As stated in the Products Release, system 

reliability issues that lead to voluntary supply 

curtailments would be considered ‘‘physical 

factors’’ within the scope of the seventh element. 

See 77 FR at 48239 n.345. 

27The CFTC confirms that, as stated in the 

Proposed Interpretation and in the Products 

Release, the deliverable quantities allowable under 

embedded volumetric optionality may be justified 

by a combination of regulatory requirements and 

physical factors, such that the quantity provided for 

by the embedded volumetric optionality may 

reasonably exceed quantities required by regulation. 

See 77 FR at 48238 n.340. 

28See 77 FR at 48228 (‘‘The primary purpose of 

a forward contract is to transfer ownership of the 

commodity and not to transfer solely its price risk.’’) 

(emphasis added). See also Letter from American 

Gas Association (‘‘AGA’’) (Dec. 22, 2014) at 8–10; 

Letter from Coalition for Derivatives End-Users 

(Dec. 22, 2014) at 6; Letter from American Public 

Power Association, Edison Electric Institute, 

Electric Power Supply Association, Large Public 

Power Council, and National Rural Electric 

Cooperative Association (‘‘Joint Associations’’) 

(Dec. 22, 2014) at 4–5; Letter from Southern 

Company Services Inc., acting on behalf of and as 

agent for Alabama Power Co., Georgia Power Co., 

Gulf Power Co., Mississippi Power Co., and 

Southern Power Co. (Dec. 22, 2014) at 2–3. 

29See 77 FR at 48227–36. 

30See 1985 CFTC OGC Interpretation, 50 FR at 

39658. But see supra note 23; Letter from National 

Corn Growers Association and Natural Gas Supply 

Association (Dec. 22, 2014) (recognizing that price 

concerns are acceptable ‘‘if they arise subsequent to 

execution or are motivated by an applicable 

regulatory requirement’’). 

31See Letter from the National Rural Electric 

Cooperative Association, the American Public 

Power Association, the Large Public Power 

Association, and the Transmission Access Policy 

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

32The CFTC further clarifies that its 

interpretations regarding full requirements and 

output contracts, as provided in the Products 

Release, remain relevant and unaffected by the 

discussion herein. See 77 FR at 48239–40. 

Similarly, the CFTC reiterates that, depending on 

the relevant facts and circumstances, capacity 

contracts, transmission (or transportation) service 

agreements, tolling agreements, and peaking supply 

contracts, as discussed in the Products Release, may 

qualify as forward contracts with embedded 

volumetric optionality provided they meet the 

elements of the CFTC’s proposed interpretation. See 

77 FR 48240. 

33Letter from AGA (Dec. 22, 2104) at 12, 19 

(requesting relief for market participants who 

reported transactions as trade options that, 

following adoption of the Proposed Interpretation, 

they would consider excluded forwards); Letter 

from EDFTNA (Dec. 22, 2014) at 5–7 (arguing that 

reassessment of the legal character of an existing 

As indicated in the Proposed 

Interpretation, the focus of the seventh 

element is the intent of the party with 

the right to exercise the embedded 

volumetric optionality at the time of 

contract initiation.23 In line with the 

CFTC’s historical interpretation of the 

forward contract exclusion, as discussed 

in the Products Release, such intent may 

be ascertained by the relevant facts and 

circumstances surrounding the contract, 

including the parties’ course of 

performance thereunder.24

Nevertheless, commercial parties may 

rely on counterparty representations 

with respect to the intended purpose for 

embedding volumetric optionality in the 

contract provided they do not have 

information that would cause a 

reasonable person to question the 

accuracy of the representation. In 

response to commenters, the CFTC 

clarifies that commercial parties are not 

required to conduct due diligence in 

order to rely on such representations.25

The CFTC clarifies that the seventh 

element’s reference to ‘‘physical factors’’ 

should be construed broadly to include 

any fact or circumstance that could 

reasonably influence supply of or 

demand for the nonfinancial commodity 

under the contract. Such facts and 

circumstances could include not only 

environmental factors, such as weather 

or location, but relevant ‘‘operational 

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

reliable transportation or technology) 

and broader social forces, such as 

changes in demographics or 

geopolitics.26 The CFTC further clarifies 

that the parties’ having some influence 

over such physical factors (e.g., the 

scheduling of plant maintenance, plans 

for business expansion) would not be 

inconsistent with the seventh element, 

provided that the embedded volumetric 

optionality is included in the contract at 

initiation primarily to address potential 

variability in a party’s supply of or 

demand for the nonfinancial 

commodity, consistent with the 

purposes of a forward contract. 

The CFTC reiterates, however, that if 

the embedded volumetric optionality is 

primarily intended, at contract 

initiation, to address concerns about 

price risk (e.g., to protect against 

increases or decreases in the cash 

market price), the seventh element 

would not be satisfied absent an 

applicable regulatory requirement, 

including guidance, whether formal or 

informal, received from a public utility 

commission or other similar governing 

body, to obtain or provide the lowest 

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

company regulated on a cost-of-service 

basis).27 The CFTC recognizes that, as 

commenters have pointed out, price is 

likely to be a consideration when 

entering into any contract, including a 

forward contract.28 However, to ensure 

that, as required by the first element, the 

overall nature of the contract as a 

forward is not undermined,29 the 

embedded volumetric optionality must, 

as stated above, be primarily intended 

as a means of securing a supply source 

in the face of uncertainty (arising from 

physical factors or regulatory 

requirements, such as an obligation to 

ensure system reliability) regarding the 

volume of the nonfinancial commodity 

to be needed or produced.30

Additionally, as stated in the 

Proposed Interpretation, the CFTC 

understands that in certain retail 

electric market demand-response 

programs, electric utilities have the right 

to interrupt or curtail service to a 

customer to support system reliability.31

The CFTC clarifies that, given that a key 

function of an electricity system 

operator is to ensure grid reliability, 

demand response agreements, even if 

not specifically mandated by a system 

operator, may be properly characterized 

as the product of regulatory 

requirements within the meaning of the 

seventh element.32

Finally, in response to requests from 

commenters, the CFTC clarifies that 

commercial parties may choose to either 

rely on their good faith characterization 

of an existing contract (e.g., as an 

excluded forward contract with 

embedded volumetric optionality or an 

exempt trade option) and or 

recharacterize it in accordance with this 

final interpretation.33


asabaliauskas on DSK5VPTVN1PROD with NOTICES
Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 28243 

contract is impractical) Letter from IECA (Dec. 22, 

2014) at 3 (arguing that requiring parties to 

reclassify their existing contracts following 

adoption of the Proposed Interpretation would be 

unduly burdensome); Letter from Joint Associations 

(Dec. 22, 2014) at 11 (requesting that the CFTC 

allow counterparties to reclassify their transactions 

following adoption of the Proposed Interpretation). 

1The phrase, ‘‘so long as the transaction is 

intended to by physically settled,’’ has been 

interpreted by the Commission to be consistent 

with its traditional approach to determining 

whether an instrument is a forward contract. As 

was stated in the Commission’s proposed rule, 

The CFTC believes that the forward contract 

exclusion in the Dodd-Frank Act with respect to 

nonfinancial commodities should be read 

consistently with th[e] established, historical 

understanding that a forward contract is a 

commercial merchandising transaction. 

Many commenters discussed the issue of whether 

the requirement in the Dodd-Frank Act that a 

transaction be ‘‘intended to be physically settled’’ 

in order to qualify for the forward exclusion from 

the swap definition with respect to nonfinancial 

commodities reflects a change in the standard for 

determining whether a transaction is a forward 

Continued 

The CFTC believes that these 

modifications are appropriately 

measured to clarify the meaning of 

certain language in the seventh element 

and should not be construed as a shift 

in the CFTC’s longstanding precedent 

on the difference between forward 

contracts and options. 

By the Securities and Exchange 

Commission. 

Dated: May 12, 2015. 

Brent J. Fields, 

Secretary. 

Issued in Washington, DC, on May 12, 

2015, by the Commodity Futures Trading 

Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Commodity Futures Trading 

Commission (CFTC) Appendices to 

Forward Contracts With Embedded 

Volumetric Optionality—Commission 

Voting Summary, Chairman’s 

Statement, and Commissioner’s 

Statement 

Appendix 1—Commodity Futures 

Trading Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Wetjen, Bowen, and 

Giancarlo voted in the affirmative. No 

Commissioner voted in the negative. 

Appendix 2—Statement of Support of 

CFTC Chairman Timothy G. Massad 

I support the staff’s recommendations to 

finalize a proposal we made in November 

regarding contracts with embedded 

volumetric optionality—a contractual right to 

receive more or less of a commodity at the 

negotiated contract price. 

As I said in my statement on the proposal, 

with reforms as significant as these, it is 

inevitable that there will be a need for some 

minor adjustments. And that is what we are 

doing. The changes we are proposing today 

help ensure that as we regulate the potential 

for excessive risks in these markets, we make 

sure that the commercial businesses— 

whether they are farmers, ranchers, 

manufacturers or others—that rely on these 

markets to hedge routine risks can continue 

to do so efficiently and effectively. 

Specifically, we proposed to clarify when 

a contract with embedded volumetric 

optionality will be excluded from being 

considered a swap. We received a number of 

comments on this and we have incorporated 

some of the concerns in the final 

clarification. Today, following action by the 

SEC last week, we are posting to the Federal 

Register the final interpretation. By clarifying 

how these agreements will be treated for 

regulatory purposes, the interpretation 

should make it easier for commercial 

companies to continue to use these types of 

contracts in their daily operations. 

In certain situations, commercial parties 

are unable to predict at the time a contract 

is entered into the exact quantities of the 

commodity that they may need or be able to 

supply, and the embedded volumetric 

optionality offers them the flexibility to vary 

the quantities delivered accordingly. The 

CFTC put out an interpretation, consisting of 

seven factors, to provide clarity as to when 

such contracts would fall within the forward 

contract exclusion from the swap definition, 

but some market participants have felt this 

interpretation, in particular the seventh 

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

two parties would reach different 

conclusions about the same contract. 

Today we are finalizing clarifications to the 

interpretation that I believe will alleviate this 

ambiguity and allow contracts with 

volumetric optionality that truly are intended 

to address uncertainty with respect to the 

parties’ future production capacity or 

delivery needs, and not for speculative 

purposes or as a means to obtain one-way 

price protection, to fall within the exclusion. 

Appendix 3—Concurring Statement of 

CFTC Commissioner Sharon Y. Bowen 

Today we are approving a final 

interpretation regarding forward contracts 

with embedded optionality. This 

interpretation is improved compared to the 

proposed interpretation and I am voting in 

favor of it. However, I am concerned that this 

interpretation does not provide the clarity 

that may be required. 

Staff has done a remarkable job in 

considering the comments received and 

drafting this final interpretation and they 

deserve ample praise for their hard work. 

Yet, staff, and this Commission, face 

statutory restrictions regarding the 

definitions of forwards and options that place 

limits on the relief available through 

interpretations of the forward contract 

exclusion. There is no interpretation, by this 

Commission or its staff, which can turn an 

option into a forward. 

Given the interpretive questions about the 

final rule defining ‘‘swap’’ and the 

difficulties in classifying forward contracts 

with embedded optionality, I think it is 

important to be clear on what this 

interpretation can and cannot do—I do not 

want people to make business decisions 

based upon a mistaken belief that they have 

received relief when they have not. 

The central issue industry faces is that, in 

the manufacturing, agriculture and energy 

sectors, a wide variety of physicallydelivered instruments are used to secure 

companies’ commercial needs for a physical 

commodity. These instruments often contain 

elements of both a forward contract and a 

commodity option. These contracts, 

particularly in the energy sector, are all 

commonly referred to as physical contracts, 

and they, according to what I have been told, 

often receive similar treatment from both a 

business operations and an accounting 

standpoint within the entities that use them. 

Furthermore, my understanding is that 

these physical contracts are often handled 

and accounted for separately from other 

derivatives, such as futures contracts or cashsettled swaps. Treating some portion of these 

physical contracts as swaps simply because 

they may contain some characteristics of 

commodity options can lead to significant 

costs and difficulties. For instance, 

companies may have to reconfigure their 

business systems to parse transactions where 

there was, before Dodd Frank, no need to 

undertake such a reconfiguration. 

I have studied this issue closely, meeting 

with industry and the public and reviewing 

the comments we have received. In the case 

of these transactions which are used to 

address physical commodity needs, I have 

doubts about whether any public interest is 

served by requiring manufacturing, 

agricultural and energy companies to 

undertake such a burden and reconfigure 

processes to comply with Commission swap 

regulations. 

The limits on relief through this 

interpretation flow from the statutory lines 

drawn between options and forward 

contracts. Under the CEA, options and 

forwards are discrete, mutually exclusive 

categories. Options are subject to the 

Commission’s plenary, exclusive jurisdiction. 

Forward contracts, on the other hand, are 

almost entirely excluded from the 

Commission’s jurisdiction. If a contract, or 

some portion of a contract, meets the 

definition of an ‘‘option,’’ that portion which 

is an option inherently cannot be a forward 

contract. 

Under the CEA, a critical difference 

between a physically-delivered option and a 

forward contract is the nature of the delivery 

obligation. A forward contract binds both 

parties to make and take delivery of a 

commodity at some date in the future. The 

contract may only be offset through a 

separate negotiation of the parties. In a 

physically-settled option contract, only the 

party offering the option is bound to make or 

take delivery at the time of contract. 

The forward contract exclusion from the 

swap definition, applies only to a ‘‘[A] sale 

of a nonfinancial commodity or security for 

deferred shipment or delivery, so long as the 

transaction is intended to be physically 

settled.’’ The key part of this definition is 

that it only applies to a ‘‘sale’’ of a 

commodity. A ‘‘sale’’ means that one party 

has agreed to make and the other to take 

delivery of that commodity.1


asabaliauskas on DSK5VPTVN1PROD with NOTICES
28244 Federal Register / Vol. 80, No. 95 / Monday, May 18, 2015 / Notices 

contract. Because a forward contract is a 

commercial merchandising transaction, intent to 

deliver historically has been an element of the 

CFTC’s analysis of whether a particular contract is 

a forward contract. In assessing the parties’ 

expectations or intent regarding delivery, the CFTC 

consistently has applied a ‘‘facts and 

circumstances’’ test. Therefore, the CFTC reads the 

‘‘intended to be physically settled’’ language in the 

swap definition with respect to nonfinancial 

commodities to reflect a directive that intent to 

deliver a physical commodity be a part of the 

analysis of whether a given contract is a forward 

contract or a swap, just as it is a part of the CFTC’s 

analysis of whether a given contract is a forward 

contract or a futures contract. Proposed Rule on 

‘‘Further Definition of ‘Swap,’ ‘Security-Based 

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

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, 76 FR 29818, 29828 (May 23, 2011) 

(‘‘Proposed Products Release’’). 

This interpretation was ratified in the final rule, 

‘‘Further Definition of ‘Swap,’ ‘Security-Based 

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

Mixed Swaps; Security-Based Swap Agreement 

Recordkeeping, 77 FR 48208, 48227–48228 (August 

13, 2012) (‘‘Products Release’’). 2See also, Products Release at 4236–37. 

An option, in contrast, is only the option 

to undertake such a ‘‘sale’’, not the sale itself. 

The sale occurs only when the option is 

exercised. The option to buy or sell a 

commodity at some later point simply is not 

the same thing as the sale of that commodity 

itself. The Commission’s Office of the 

General Counsel memorialized this 

interpretation in 1985: 

[T]he [forward] contract must be a binding 

agreement on both parties to the contract: 

One must agree to make delivery and the 

other to take delivery of the commodity. 

Second, because forward contracts are 

commercial, merchandizing transactions 

which result in delivery, the courts and the 

Commission have looked for evidence of the 

transactions’ use in commerce. Thus, the 

courts and the Commission have examined 

whether the parties to the contracts are 

commercial entities that have the capacity to 

make or take delivery and whether delivery, 

in fact, routinely occurs under such contracts 

* * * * * 

Thus, an option is a contract in which only 

the grantor is obligated to perform. As a 

result, the option purchaser has a limited risk 

from adverse price movements. This 

characteristic distinguishes an option from a 

forward contract in which both parties must 

routinely perform and face the full risk of 

loss from adverse price changes since one 

party must make and the other take delivery 

of the commodity. In contrast, in an option, 

only the grantor of a call (put) is required to 

sell (buy) a given quantity of a commodity (or 

a futures contract on that commodity) on or 

by a specified date in the future if the option 

is exercised. ‘‘Characteristics Distinguishing 

Cash and Forward Contracts and ‘Trade 

Options’ ’’, 50 FR 39656–02 (September 30, 

1985) 

The Commission ratified this interpretation 

in 1990 in its ‘‘Statutory Interpretation 

Concerning Forward Transactions’’, 55 FR 

39188–03 (September 25, 1990) (‘‘Brent 

Interpretation’’) and again in 2012 its final 

rule, ‘‘Further Definition of ‘Swap,’ ‘SecurityBased Swap,’ and ‘Security-Based Swap 

Agreement’; Mixed Swaps; Security-Based 

Swap Agreement Recordkeeping, 77 FR 

48208, 48227–48235 (August 13, 2012) 

(‘‘Products Release’’). In doing so, the 

Commission explicitly rejected the argument 

that physically-delivered commodity options 

could fall within the forward contract 

exclusion.2

The interpretation being promulgated 

today does not change this, and therein lays 

my concern regarding this interpretation’s 

limits. 

I think much of the confusion regarding the 

seven-part test has been based upon a failure 

to recognize the difference between forward 

and option contracts under the Commodity 

Exchange Act. The fact that a forward 

contract element and a commodity option are 

packaged together does not change the 

regulatory treatment of the different 

components. Hybrid or packaged instruments 

are common throughout the industry. There 

are hybrid or packaged instruments which 

may have characteristics of futures contracts 

and securities, swaps and security-based 

swaps, futures and forward transactions, and 

even forward contracts and commodity 

options. Each portion of the contract might 

be subject to different regulatory treatment. A 

security does not become a future, nor does 

a future become a security simply by virtue 

of being packaged in the same instrument. 

Relevant to the instruments we are 

discussing today, forward contracts with 

embedded volumetric optionality, it seems 

that most of them, as described in the 

comments, have at least two separate, 

identifiable contractual obligations, each of 

which must be considered on their own 

merits. There is a forward contract element 

which binds the parties to make and take 

delivery of a set amount of a commodity. In 

addition, there is an embedded volumetric 

optionality element that binds the forward 

contract offeror to make or take delivery of 

an additional amount of the commodity if the 

embedded volumetric optionality is 

exercised by the forward contract offeree. 

The latter contractual obligation looks like a 

classic option. 

The difficulty this interpretation faces in 

providing the relief industry seeks is this: 

Even though the embedded optionality has 

the form of an option, can it somehow fit 

within the forward exclusion? The answer 

this interpretation gives is, essentially, yes, it 

can, if it can be demonstrated that, despite 

the embedded optionality having the form of 

an option, it is utilized, in practice, as a 

forward contract. While the seven-prong test 

and the interpretive guidance around it do 

not provide an exact roadmap for 

determining when embedded volumetric 

optionality included in a forward contract 

may or may not fall into the option 

definition, or when embedded volumetric 

optionality may undermine a forward 

contract, I think it does provide a good sense 

of the factors that parties must consider in 

making those determinations for themselves. 

Such a test, however, is necessarily a facts 

and circumstances test with no bright lines. 

Ensuring compliance with this interpretation 

poses a challenge, and, therefore, that is an 

area where I would like to see greater legal 

certainty for these contracts. 

In closing, I support this final 

interpretation, but I think industry would 

benefit from broader relief that provides 

greater legal certainty. I look forward to 

continuing to work with my fellow 

Commissioners and staff to make sure that 

commercial entities have access to the tools 

they need to manage the commercial risks of 

their operations. 

[FR Doc. 2015–11946 Filed 5–15–15; 8:45 am] 

BILLING CODE 8011–01–p 6351–01–P 

BUREAU OF CONSUMER FINANCIAL 

PROTECTION 

[Docket No. CFPB–2015–0020] 

Agency Information Collection 

Activities: Comment Request 

AGENCY: Bureau of Consumer Financial 

Protection. 

ACTION: Notice and request for comment. 

SUMMARY: In accordance with the 

Paperwork Reduction Act of 1995 

(PRA), the Consumer Financial 

Protection Bureau (Bureau) is requesting 

to renew the approval for an existing 

information collection titled, ‘‘Mortgage 

Acts and Practices (Regulation N) 12 

CFR 1014.’’ 

DATES: Written comments are 

encouraged and must be received on or 

before July 17, 2015 to be assured of 

consideration. 

ADDRESSES: You may submit comments, 

identified by the title of the information 

collection, OMB Control Number (see 

below), and docket number (see above), 

by any of the following methods: 

• Electronic: http://

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Mail: Consumer Financial 

Protection Bureau (Attention: PRA 

Office), 1700 G Street NW., Washington, 

DC 20552. 

• Hand Delivery/Courier: Consumer 

Financial Protection Bureau (Attention: 

PRA Office), 1275 First Street NE., 

Washington, DC 20002. 

Please note that comments submitted 

after the comment period will not be 

accepted. In general, all comments 

received will become public records, 

including any personal information 

provided. Sensitive personal 

information, such as account numbers 

or social security numbers, should not 

be included. 

FOR FURTHER INFORMATION CONTACT: 

Documentation prepared in support of 

this information collection request is 

available at www.regulations.gov. 

Requests for additional information 

should be directed to the Consumer 

Financial Protection Bureau, (Attention: 


asabaliauskas on DSK5VPTVN1PROD with NOTICES