COMMODITY FUTURES TRADING COMMISSION

RETAIL COMMODITY TRANSACTIONS UNDER COMMODITY EXCHANGE ACT

SECTION 2(c)(2)(D)

RIN 3038-AD64

AGENCY: COMMODITY FUTURES TRADING COMMISSION

ACTION: INTERPRETATION; REQUEST FOR COMMENTS

SUMMARY: The Commodity Futures Trading Commission ("Commission" or "CFTC") is

issuing this interpretation ofthe term "actual delivery" as set forth in section

2(c)(2)(D)(ii)(III)(aa) ofthc Commodity Exchange Act ("CEA") pursuant to section 742(a) of

the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Commission requests

comment on whether this interpretation accurately construes the statutory language. In the event

that comments dcmonstrate a need to modify this interpretation, the Commission will take

appropriate action.

DATES: Effective [INSERT DATE OF PUBLICAnON IN FEDERAL REGISTER].

Comments must be reccived by [INSERT DATE 60 DAYS AFTER PUBLICATION IN

FEDERAL REGISTER], 2012.

ADDRESSES: Comments, idcntified by RIN number, may be sent by any ofthe foHowing

mcthods:

• Agency Website, via its Comments Online process: http://comments.cjic.gov. Follow the

instructions for submitting comments through the website.

• Mail: David A. Stawick, Secretary ofthe Commission, Commodity Futures Trading

Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

• Hand Delivery/Col/riel': Same as mail above.

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• Federal eRulell1aking Portal: http://www.regulations.gov. Follow the instructions for

submitting comments.

FOR FURTHER INFORMATION CONTACT:

Rosemary Hollinger, Regional Counsel, Division of Enforcement, 312-596-0538,

rhollinger@cjlc.gov, or Martin B. White, Assistant General Counsel, Office ofthe General

Counsel, 202-418-5129, I11white@cjlc.gov, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

All comments must be submitted in English, or, if not, accompanied by an English

translation. Comments will be posted as received to http://www.cjlc.gov, You should submit only

information that you wish to make available publicly. If you wish the Commission to consider

information that may be exempt from disclosure under the Freedom ofInfol'lnation Act

("ForA"),l a petition for confidential treatment ofthe exempt information may be submitted

according to the established procedures in § 145.9 ofthe CFTC's regulations.2 The Commission

reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse, or

remove any or all of your submission from http://www,cjlc.govthat 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 ofthe 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 ForA.

SUPPLEMENTARY INFORMAnON

I 5 U.S.C. § 552.

2 17 C.F.R. § 145.9.

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T. Background

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and

Consumer Protection Act ("Dodd-Frank Act,,).3 Title VII ofthe Dodd-Frank Act4 amended the

Commodity Exchange Act ("CEA,,)5 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 ofswap dealers and major swap

participants; (2) imposing clearing and trade execution requirements on standardized dcrivative

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.

In addition, section 742(a) ofthe Dodd-Frank Act amends section 2(c)(2) ofthe CEA to

add a new subparagraph, section 2(c)(2)(D) ofthe CEA,6 entitled "Retail Commodity

Transactions." New CEA section 2(c)(2)(D) provides the Commission with a new source of

jurisdiction over certain retail commodity transactions. 7 Congress enacted this provision

following court decisions, including CFTC v. Zelener, 8 that narrowly interpreted the term

"contract ofsale of a commodity for future delivery"-the statutory term for a futures contract3 See Dodd-Frank Wall Street Reform and Consumer Protection Act of2010, Public Law 111-203, 124 Stat. 1376

(2010). The text ofthe Dodd-Frank Act may be accessed at

hltp://w\l~v.cjlc.gov/LawRegulalion/OTCDERIVAlIVES/index.h1m.

4 Pursuant to section 701 of the Dodd-Frank Act, Title Vllmay be cited as the "Wall Street Transparency and

Accountability Act of20l0."

'7 U.S.C. § 1 el seq.

6 7 U.S.C. § 2(c)(2)(D).

7 The jurisdictional grant provided to the Commission by new CEA section 2(c)(2)(D) is in addition to, and

independent from, the jurisdiction over contracts ofsale of a commodity for future delivery and transactions subject

to regulation pursuant to CEA section 19 that the CEA has historically granted to the Commission. The

jurisdictional grant provided by new CEA section 2(c)(2)(D) is also in addition to, and independent from, the

jurisdiction over swaps granted to the Commission by the Dodd-Frank Act.

8373 FJd 861 (7th Cir. 2004); see also CFTCv. Erskine, 512 F.3d 309 (6th Cir. 2008).

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based on language in customer agreements. Zelener involved retail foreign currency transactions

that were characterized as spot sales in contract documents, but in which, in practice, customer

positions were held open indefinitely and customers never took delivery offoreign currency. 9

Zelener held that the transactions were not subject to CFTC jurisdiction because they did not

involve futures contracts but were "in form, spot sales for delivery within 48 hours." 10 In so

ruling, the court focused solely on the language ofthe customer agreements.

Following Zelener, Congress provided the Commission with additional authority over

retail foreign currency transactions in the CFTC Reauthorization Act of 2008.[[ Similarly, in

section 742(a) ofthe Dodd-Frank Act, Congress provided the Commission with additional

authority over non-foreign currency retail commodity transactions by making specified forms of

these transactions subject to certain provisions ofthe CEA regardless of whether they involve a

"contract ofsale of a commodity for future delivery." Senator Lincoln explained the rationale for

this legislation during floor debate on the Dodd-Frank Act:

[the] contracts [in Zelener] function just like futures contracts, but the court of

appcals, ... based on the wording ofthe contract documents, held them to be spot

contracts outside of CFTC jurisdiction. Thc CFTC Reauthorization Act of 2008,

which was enacted as part ofthat year's Farm Bill, clarified that such transactions

in foreign currency are subject to CFTC anti-fraud authority. It left open the

possibility, however, that such Zelener-type contracts could still escape CPTC

jurisdiction if used for other commodities such as energy and metals.

9373 F.3d at 863-64.

10 ld. at 868-69.

II Food, Conservation and Energy Act of2008, Public Law 110-246, 122 Stat. 1651 (2008).

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Section 742 corrccts this by extending the Farm Bill's "Zelener fraud fix"

to retail off-exchange transactions in all commodities. Further, a transaction with

a retail customer that meets the leverage and other requirements set forth in

Section 742 is subject not only to the anti-fraud provisions of CEA Section 4b

(which is the case for foreign currency), but also to the on-exchange trading

requirement of CEA Section 4(a), "as if' the transaction was a futures contract. 12

Accordingly, new CEA section 2(c)(2)(D) broadly applies to any agreement, contract, or

transaction in any commodity that is entered into with, or offered to (even if not entered into

with), a non-eligible contract participant or non-eligible commercial entity on a leveraged or

margined basis, or financed by the offeror, the counterparty, or a person acting in concert with

the offeror or counterparty on a similar basis. 13 New CEA section 2(c)(2)(D) further provides

that such an agreement, contract, or transaction shall be subject to CEA sections 4(a),14 4(b),15

12 156 CONG, REC. S5,924 (daity ed. July 15,2010) (statement of Sen. Lincoln); see also Hearing to Review

Implications ofthe CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities and Risk

Managemell/ ofthe H. Comm. on Agriculture, IIIth Congo 52-664 (2009) ("In 2004 the Seventh Circuit Court made

a decision in the CFTC v. Zerener [case]. It adopted a narrow definition ofthe term 'transactions for future delivery.'

What it held is that a 3-day contract offered to retait customers for foreign currency that on its face promised

delivery was not a futures contract and was, therefore, outside the CFTC's jurisdiction, This was even though the

contracts operated in practice as futures contracts, Following the Zelener decision, many [fraudsters] were given a

roadmap to evade CFTC jurisdiction and to scam customers or consumers.") (statement of Hon. Leonard L.

Boswell, United States Representative and Chairman, Subcommittee on General Farm Commodities and Risk

Management); ("What we are talking about here though is expanding the-well, correcting would be the argument

the Zelener interpretation ofwhat a futures contract is. If in substance it is a futures contract, it is going to be

regulated. It doesn't matter how clever your draftsmanship is.") (statement ofHan. Jim Marshall, United States

Representative).

13 7 U.S,c. § 2(c)(2)(D)(i).

14 7 U.S.C. § 6(a).

15 7 U,S.C. § 6(b).

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and 4bl6 "as ifthe agreement, contract, or transaction was a contract ofsale of a commodity for

future delivery." 17

New CEA section 2(c)(2)(D) excepts certain transactions from its application. In

particular, new CEA section 2(c)(2)(D)(ii)(III)(aa)18 excepts a contract ofsale that "results in

actual delivery within 28 days or such other longer period as the Commission may determine by

rule or regulation based upon the typical commercial practice in cash or spot markets for the

commodity involved.,,19

The Commission is issuing this interpretation to inform the public ofthe Commission's

views as to the meaning ofthe term "actual delivery" as used in new CEA section

2(c)(2)(D)(ii)(III)(aa) and to provide the public with guidance on how the Commission intends to

assess whether any given transaction results in actual delivery within the meaning ofthe

statute?O The Commission requests comment on whether its interpretation of "actual delivery"

accurately construes the statutory language.

16 7 U.S.C. § 6b.

17 7 U.S.C. § 2(c)(2)(D)(iii).

18 7 U.S.C. § 2(c)(2)(D)(ii)(Ill)(aa).

19 The Commission has not adopted any regulations permitting a longer actual delivery period for any commodity

pursuant to new CEA section2(c)(2)(D)(ii)(IlI)(aa). Accordingly, the 28-day actual delivety period set fOl1h in this

grovision remains applicable to all commodities.

o In 1985, the Commission's Office of General Counsel issued a staff interpretation determining whether certain

hypothetical precious metals transaetions would be subject to regulation under the CEA. Interpretive Letter 85-2,

Bank Activities Involving the Sale ofPrecious Metals (CFTC Office of General Counsel Aug. 6, 1985), Comm. Fut.

L. Rep. (CCH) 22,673 ("Letter 85-2"). Letter 85-2 opined on whether the hypothetical transactions would

constitute leverage contracts, as defined by 17 C.F.R. § 31.4(w), or contracts ofsale of a commodity for future

delivery, as that term is used in CEA section 2(a)(l)(A). Letter 85-2 is not relevant to a determination ofwhether

"actual delivery" has occurred within the meaning of new CEA section2(c)(2)(D)(ii)(IIl)(aa) for several reasons,

inclUding, but not limited to, the following: (I) Letter 85-2 predates new CEA section 2(c)(2)(D) by approximately

26 years and therefore does not purport to construe new CEA section 2(c)(2)(D); (2) to the extent Letter 85-2

assumes the occurrence of delivety of a commodity, it does not purport to determine whether "actual delivery" has

occurred under new CEA section 2(c)(2)(D)(ii)(Ill)(aa); and (3) new CEA section 2(c)(2)(D)(iii) explicitly subjects

certain retail commodity transactions to CEA sections 4(a), 4(b), and 4b "as if' they were contracts of sale of a

commodity for future delivery, regardless of whether they are, in fact, contracts ofsale ofa commodity for future

delivery under CEA section2(a)(l)(A).

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This interpretation does not address the meaning or scope of new CEA section

2(c)(2)(D)(ii)(III)(bbi1

or any exception to new CEA section 2(c)(2)(D) other than new CEA

section 2(c)(2)(D)(ii)(III)(aa). Similarly, this interpretation does not address the meaning or

scope of contracts ofsale of a commodity for future delivery, the forward contract exclusion

from the term "future delivery" set forth in CEA section Ia(27),22 or the forward contract

exclusion from the term "swap" set forth in CEA sectionla(47)(B)(ii).23 Nor does this

interpretation alter any statutory interpretation or statement of Commission policy relating to the

forward contract exclusion.24

II. Commission lnterpl'etation of "Actual Delivery"

In the view ofthe Commission, the determination ofwhether "actual delivery" has

occurred within the meaning of new CEA section 2(e)(2)(D)(ii)(III)(aa) requires consideration of

evidence regarding delivery beyond the four corners of contract documents. This interpretation

ofthe statutory language is based on Congress's use ofthe word "actual" to modify "delivery"

and on the legislative history of new CEA section 2(c)(2)(D)(ii)(III)(aa) described above.

Consistent with this interpretation ofthe statutory language, in determining whether actual

delivery has occurred within 28 days, the Commission will employ a functional approach and

examine how the agreement, contract, or transaction is marketed, managed, and performed,

instead ofrelying solely on language used by the parties in the agreement, contract, or

transaction. This approach best accomplishes Congress's intent when it enacted section 742(a) of

the Dodd-Frank Act and gives full meaning to Congress's term "actual delivery."

21 7 U,S,C. § 2(c)(2)(D)(ii)(III)(bb).

22 7 U,S,C. § 1a(27).

23 7 U,S,C, § la(47)(B)(ii),

" See, e.g., StatutOly Interpretation Concerning Forward Transactions, 55 FR 39188 (Sept, 25, 1990) ("Brent

Interpretation").

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Relevant factors in this determination include the following: ownership, possession, title,

and physical location ofthe commodity purchased or sold, both before and after execution ofthe

agreement, contract, or transaction; the nature ofthe relationship bctween the buyer, seller, and

possessor ofthe commodity purchased or sold; and the manner in which the purchase or sale is

recorded and completed. The Commission provides the following examples to illustrate how it

will determine whether actual delivery has occurred within the meaning of new CEA scction

2(c)(2)(D)(ii)(III)(aa).

Example 1: Actual delivery will have occurred if, within 28 days, the seller has

physically delivered the entire quantity ofthe commodity purchased by the buyer, including any

portion ofthe purchase made using leverage, margin, or financing, into the possession ofthe

buyer and has transferred title to that quantity ofthe commodity to the buyer.

Example 2: Actual delivery will have occurred if, within 28 days, the seller has

physically delivered the cntire quantity ofthc commodity purchased by the buyer, including any

portion ofthe purchase made using leverage, margin, or financing, whether in specifically

segregated or fungible bulk form, into the possession of a depository other than the seller and its

parent company, partners, agents, and other affiliates, that is: (a) a financial institution as defined

by the CEA; (b) a depository, the warrants or warehouse receipts of which are recognized for

delivery purposes for any commodity on a contract market designated by the Commission; or (c)

a storage facility licensed or regulated by the United States or any United States agency, and has

transferred title to that quantity ofthe commodity to the buyer?5

25 Based on Examples I and 2, an agreement, contract, or transaction that results in "physical deliveryll within the

meaning ofsection I.04(a)(2)(i)-(iii) of the Model State Commodity Code would ordinarily result in "actual

delivery" under new CEA section 2(c)(2)(D)(ii)(III)(aa), absent other evidence indicating that the purpOlied delivery

is a sham. See Model State Commodity Code § I.04(a)(2)(i)-(iii), Comm, Fut. L. Rep. Archive (CCH) 22,568

(Apr. 5, 1985). Conversely, an agreement, contract, or transaction that does not result in "physical delivery" within

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Example 3: Actual delivery will not have occurred if, within 28 days, a book entry is

made by the seller purporting to show that delivery ofthe commodity has been made to the buyer

and/or that a sale of a commodity has subsequently been covered or hedged by the seller through

a third party contract 01' account, but the seller has not, in accordance with the methods described

in Example I or 2, physically delivered the entire quantity ofthe commodity purchased by the

buyer, including any portion ofthe purchase made using leverage, margin, 01' financing, and

transferred title to that quantity ofthe commodity to the buyer, regardless ofwhethcr the

agreement, contract, 01' transaction between the buyer and seller purports to create an enforceable

obligation on the part ofthe seller, or a parent company, patiner, agent, 01' other affiliate ofthe

seller, to dcliver the commodity to the buyer.

Example 4: Actual delivery will not have occurred if, within 28 days, the seller has

purported to physically deliver the entire quantity ofthe commodity purchased by the buyer,

including any portion ofthe purchase made using leverage, margin, 01' financing, in accordance

with the method described in Example 2, and transfer title to that quantity ofthe commodity to

the buyer, but the title document fails to identity the specific financial institution, depository, 01'

storage facility with possession ofthe commodity, the quality specifications ofthe commodity,

the identity ofthe party transferring title to the commodity to the buyer, and thc segregation 01'

allocation status ofthe commodity.

Example 5: Actual delivcry will not have occurred if, within 28 days, an agreement,

contract, or transaction for the purchase or sale of a commodity is rolled, offsct, 01' otherwise

netted with anothcr transaction 01' settled in cash between the buyer and the seller, but the seller

has not, in accordance with the methods described in Example 1 01' 2, physically delivered the

the meaning ofsection J.04(a)(2)(i)-(iii) ofthe Model State Commodity Code is highly unlikely to result in "actual

delivery" under new CEA section 2(c)(2)(D)(ii)(III)(aa).

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entire quantity ofthe commodity purchased by the buyer, including any portion ofthe purchase

made using leverage, margin, or financing, and ttansferred title to that quantity ofthe commodity

to the buyer, regardless of whether the agreement, contract, or transaction between the buyer and

seller purports to create an enforceable obligation on the part ofthe seller, or a parent company,

partner, agent, or other affiliate ofthe seller, to deliver the commodity to the buyer.

~ss\l~d;ir Wash~gton\D.f" on December 1,2011 by the Commission.

~C{.S::-~ David A. Stawick,

SecretalJ) ofthe Commission.