[Federal Register Volume 75, Number 206 (Tuesday, October 26, 2010)]
[Proposed Rules]
[Pages 65586-65593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26951]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD23


Agricultural Commodity Definition

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is charged with proposing rules to implement new statutory 
provisions enacted by Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act, 
which amends the Commodity Exchange Act (``CEA'' or ``Act''), includes 
provisions applicable to ``a swap in an agricultural commodity (as 
defined by the [CFTC]).'' Neither Congress nor the CFTC has previously 
promulgated a definition of that term for purposes of the CEA or CFTC 
regulations. This notice reviews the statutory and regulatory history 
of the term ``agricultural commodity'' in the context of the CEA and 
Commission regulations and proposes a definition of that term for 
purposes of the CEA and Commission regulations.

DATES: Comments must be received on or before November 26, 2010. The 
Commission is not inclined to grant extensions of this comment period.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD21, 
by any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail for Comments: <a href="/cdn-cgi/l/email-protection#0362646766656d73716e43606577602d646c75"><span class="__cf_email__" data-cfemail="d4b5b3b0b1b2baa4a6b994b7b2a0b7fab3bba2">[email protected]</span></a>. Include the RIN 
number 3038-AD21 in the subject line of the message.
    <bullet> Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581.
    <bullet> Hand Delivery/Courier: Same as mail above.
    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 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 established procedures in 
CFTC Regulation 145.9.\1\
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    \1\ 17 CFR 145.9.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special 
Counsel, (202) 418-5041, <a href="/cdn-cgi/l/email-protection#2e4a464b475a434f406e4d485a4d00494158"><span class="__cf_email__" data-cfemail="75111d101c0118141b35161301165b121a03">[email protected]</span></a>, or Ryne Miller, Attorney 
Advisor, (202) 418-5921, <a href="/cdn-cgi/l/email-protection#ee9c838782828b9cae8d889a8dc0898198"><span class="__cf_email__" data-cfemail="87f5eaeeebebe2f5c7e4e1f3e4a9e0e8f1">[email protected]</span></a>, Division of Market 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Part I--Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.\2\ Title VII of the Dodd-Frank Act 
\3\ amended the CEA \4\ to establish a comprehensive new regulatory 
framework for swaps and security-based swaps. The legislation was 
enacted to reduce risk, increase transparency, and promote market 
integrity within the financial system by, among other things: (1) 
Providing for the registration and comprehensive regulation of swap 
dealers and major swap participants; (2) imposing clearing and trade 
execution requirements on standardized derivative products; (3) 
creating robust recordkeeping and real-time reporting regimes; and (4) 
enhancing the Commission's rulemaking and enforcement authorities with 
respect to, among others, all registered entities and intermediaries 
subject to the Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to Sec.  701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
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    The Dodd-Frank Act includes provisions applicable to ``a swap in an 
agricultural commodity (as defined by the [CFTC]).'' Neither Congress 
nor the CFTC has previously promulgated a definition of that term for 
purposes of the CEA or CFTC regulations. This notice reviews the 
statutory and regulatory history of the term ``agricultural commodity'' 
in the context of the CEA and Commission regulations and proposes a 
definition of that term for purposes of the CEA and Commission 
regulations.

A. Statutory Framework and History--``Agricultural Commodity''

1. The Commodity Exchange Act
    In developing a proposed definition of ``agricultural commodity'' 
for purposes of the CEA and CFTC regulations, the Commission first 
considered the historical development of federal commodities regulation 
in the United States. Before 1974, the Commodity Exchange Act, 7 U.S.C. 
1 et seq., gave the Commodity Exchange Authority \5\ jurisdiction over 
only those commodities specifically enumerated in the Act. Starting 
with the 1936 Act, the CEA applied to certain transactions in 
commodities then being traded for future delivery on certain U.S. 
futures exchanges, including wheat, cotton, rice, corn, oats, barley, 
rye, flaxseed, grain sorghum, mill feeds, butter, eggs, and Solanum 
tuberosum (Irish potatoes).\6\ As the exchanges regulated under the CEA 
added futures contracts for additional commodities, all of which were 
agricultural in nature, subsequent amendments to the Act added those

[[Page 65587]]

additional commodities to the Act's list of enumerated commodities.\7\ 
Thus, prior to 1974, the CEA provided authority exclusively for the 
regulation of futures transactions in those commodities enumerated in 
the statute, all of which were agricultural in nature.
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    \5\ The Commodity Exchange Authority was an agency of the United 
States Department of Agriculture and was established to administer 
the CEA. For a detailed history of the evolution of the various 
agencies charged with administering the CEA, see http://www.archives.gov/research/guide-fed-records/groups/180.html. The 
Commodity Exchange Authority was the predecessor of the CFTC.
    \6\ See Act of June 15, 1936, Public Law 74-675, 49 Stat. 1491 
(1936), which, among other things, set out the original list of 
enumerated commodities and changed the name of the ``Grain Futures 
Act'' to the ``Commodity Exchange Act.'' However, the CEA did not 
apply to all commodity futures markets then in existence, such as 
markets for coffee, cocoa, sugar, and metals.
    \7\ Wool tops were added in 1938. Commodity Exchange Act 
Amendment of 1938, Public Law 75-471, 52 Stat. 205 (1938). Fats and 
oils, cottonseed meal, cottonseed, peanuts, soybeans and soybean 
meal were added in 1940. Commodity Exchange Act Amendment of 1940, 
Public Law No. 76-818, 54 Stat. 1059 (1940). Livestock, livestock 
products, and frozen concentrated orange juice were added in 1968. 
Commodity Exchange Act Amendment of 1968, Public Law 90-258, 82 
Stat. 26 (1968) (livestock and livestock products); Act of July 23, 
1968, Public Law 90-418, 82 Stat. 413 (1968) (frozen concentrated 
orange juice). Trading in onion futures on United States exchanges 
was prohibited in 1958. Commodity Exchange Act Amendment of 1958, 
Public Law 85-839, 72 Stat. 1013 (1958).
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    With the enactment of the Commodity Futures Trading Commission Act 
of 1974 (``the 1974 Act''),\8\ Congress overhauled the CEA and created 
the Commodity Futures Trading Commission, an independent regulatory 
agency with powers greater than those of its predecessor agency, the 
Commodity Exchange Authority. For the purposes of this Notice, the most 
significant change was that, while the Commodity Exchange Authority 
only regulated those commodities enumerated in the CEA, which were all 
agricultural in nature, the 1974 Act granted the CFTC exclusive 
jurisdiction over futures trading in all commodities traded for future 
delivery, including not only the enumerated commodities, but also ``all 
other goods and articles * * * and all services, rights, and interests 
in which contracts for future delivery are presently or in the future 
dealt in.'' \9\ For the first time, the CEA would apply to all U.S. 
futures exchanges and to the full range of commodities that were or 
could be traded for future delivery thereon, including many commodities 
that did not fall under the enumerated agricultural category--for 
example, coffee, sugar, cocoa, metals and energy products, as well as 
interest rates, currencies, and other financial commodities.\10\
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    \8\ See Commodity Futures Trading Commission Act of 1974, Public 
Law 93-463, 88 Stat. 1389 (1974).
    \9\ Except, of course, onions, which were excluded in 1958. See 
cite in footnote 7, above.
    \10\ See the pre-Dodd-Frank CEA definition of ``commodity,'' 
which had remained unchanged since the 1974 amendments: ``The term 
``commodity'' means 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, and all other goods and articles, except 
onions as provided in Public Law 85-839 (7 U.S.C. 13-1), and all 
services, rights, and interests in which contracts for future 
delivery are presently or in the future dealt in.''
    The agricultural commodities specifically identified in current 
CEA Sec.  1a(4) are often referred to as the ``enumerated'' 
agricultural commodities. The Dodd-Frank Act redesignates current 
CEA Sec.  1a(4) as new CEA Sec.  1a(9) and adds ``motion picture box 
office receipts (or any index, measure, value or data related to 
such receipts)'' as a second commodity which, along with onions, is 
specifically excluded from the Act's definition of commodity.
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2. The Commodity Futures Modernization Act
    In 2000, the Commodity Futures Modernization Act of 2000 (``CFMA'') 
\11\added certain exemptions for swaps \12\ transactions to the CEA. 
One exemption appears in current CEA Sec.  2(g).\13\ With the Sec.  
2(g) swaps exemption, Congress for the first time made an explicit 
distinction between agricultural commodities and other commodity 
categories. The Sec.  2(g) exemption explicitly excluded any 
``agreement, contract, or transaction'' in an ``agricultural 
commodity.'' Instead of providing a definition for agricultural 
commodity in this context, Congress used the term in conjunction with 
the definition of exempt commodity--defined as neither an agricultural 
commodity nor an excluded commodity.\14\ Excluded commodities were in 
turn defined at current CEA Sec.  1a(13) to include financial 
commodities such as interest rates, currencies, economic indexes, and 
other similar items. Thus, of the three operative terms, only 
agricultural commodity was not ascribed a formal definition.\15\
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    \11\ The CFMA was enacted into law as Appendix E to Public Law 
106-554, the Consolidated Appropriations Act, 2001 (2000).
    \12\ Prior to the Dodd-Frank Act, the Commission had defined a 
``swap'' as follows: ``A swap is a privately negotiated exchange of 
one asset or cash flow for another asset or cash flow. In a 
commodity swap [including an agricultural swap], at least one of the 
assets or cash flows is related to the price of one or more 
commodities.'' (See 72 FR 66099, note 7 (November 27, 2007)). See 
new CEA Sec.  1a(47) for the statutory definition of a ``swap,'' as 
added to the CEA by Sec.  721 of the Dodd-Frank Act.
    \13\ Current Sec.  2(g) provides:
    Excluded swap transactions
    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 Sec.  2(g), 7 U.S.C. Sec.  2(g). Current CEA Sec.  2(g) was 
added to the CEA by Sec.  105(b) of the CFMA, enacted as Appendix E 
to Public Law 106-554.
    \14\ ``The term `exempt commodity' means a commodity that is not 
an excluded commodity or an agricultural commodity.'' Current CEA 
Sec.  1a(14).
    \15\ Another swap exemption was provided in current CEA Sec.  
2(h), which affects transactions in exempt commodities. Current CEA 
Sec.  2(h) was added to the CEA by Sec.  106 of the CFMA. Also, 
current CEA Sec.  2(d) contains a swap exemption for transactions in 
excluded commodities. Current CEA Sec.  2(d) was added to the CEA by 
Sec.  103 of the CFMA.
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    There is limited legislative history regarding the CFMA to explain 
Congress' intent in excluding ``agricultural commodities'' from the 
Sec.  2(g) swaps exemption.\16\ However, the legislative history of 
H.R. 4541 (106th Congress), the predecessor to the CFMA (H.R. 
5660),\17\ which included the same basic structure of excluded and 
exempt commodities, indicates that Congress did not intend that the 
term ``agricultural commodity'' be limited to those commodities 
enumerated in the definition of the term ``commodity'' in current CEA 
Sec.  1a(4).\18\ The House Committee on Agriculture stated the 
following:
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    \16\ H.R. 5660, the final version of the CFMA, which was enacted 
into law as an appendix to Public Law 106-554, the Consolidated 
Appropriations Act, 2001, was not accompanied by congressional 
committee reports.
    \17\ H.R. 4541, also titled the Commodity Futures Modernization 
Act of 2000, was reported by all three committees of jurisdiction 
(Agriculture, Commerce, and Banking and Financial Services) in the 
House of Representatives and was passed by the House on October 19, 
2000 by a vote of 377 yeas to 4 nays. On December 14, 2000, H.R. 
5660 was introduced and contained major provisions of the House-
passed version of H.R. 4541.
    \18\ See footnote 10 above.

    The Committee notes that the term ``exempt commodity'' means a 
commodity other than an ``excluded commodity'' or an ``agricultural 
commodity.'' For purposes of this definition, the Committee intends 
``agricultural commodity'' to include all agricultural commodities, 
whether or not such agricultural commodities are specifically 
enumerated in the definition of ``commodity'' in section 1a[4] of 
the CEA.\19\
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    \19\ H.R. Rep. No. 106-711, Part 1, at 33 (June 29, 2000).

Notably, the definition of exempt commodity, and its interplay with 
both agricultural and excluded commodities, did not change from H.R. 
4541 to H.R. 5660, the final version of the CFMA as enacted into law.
3. The Dodd-Frank Act
    The Dodd-Frank Act, when it becomes effective, will delete two 
references to ``agricultural commodity'' that were added to the CEA by 
the CFMA.\20\ First, the Dodd-Frank Act will

[[Page 65588]]

delete the current CEA Sec.  2(g) swaps exemption.\21\ Second, the 
Dodd-Frank Act will eliminate a provision, found in current CEA Sec.  
5a(b)(2)(F), that deals with the permissibility of trading agricultural 
commodities on a derivatives transaction execution facility (``DTEF''). 
The Dodd-Frank Act repeals current CEA Sec.  5a \22\ (which provides 
for the registration and regulation of DTEFs).\23\
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    \20\ Two other references to agricultural commodities that were 
added to the CEA by the CFMA will remain in the CEA, but are not 
relevant to defining an agricultural commodity. CEA Sec.  5c(c) 
provides that a designated contract market must seek prior 
Commission approval for any rule amendment that would make material 
changes in any futures contract in an enumerated agricultural 
commodity, if the rule amendment applies to contracts and delivery 
months which have been listed for trading and have open interest. 
CEA Sec.  4q requires the Commission to consider procedures to 
encourage bona fide hedging on contract markets by domestic 
agricultural producers.
    Title IV of the CFMA included an additional reference to 
``agricultural commodity'' that was not an amendment to the CEA. The 
Legal Certainty for Bank Products Act, enacted as Title IV of the 
CFMA, includes a definition of ``covered swap agreement'' that 
incorporates a reference to ``a commodity other than an agricultural 
commodity enumerated in section 1a(4).'' Section 725(g) of the Dodd-
Frank Act deletes all references to ``covered swap agreement,'' 
including the reference to agricultural commodities, from the Legal 
Certainty for Bank Products Act.
    \21\ See Sec.  723(a)(1)(A) of the Dodd-Frank Act. That 
provision of the Dodd-Frank Act will also delete current CEA Sec.  
2(h) regarding swaps in exempt commodities. Current CEA Sec.  2(h) 
does not explicitly mention agricultural commodities but, as noted 
above, exempt commodities are defined as those that are neither 
agricultural nor excluded commodities.
    \22\ See Sec.  734(a) of the Dodd-Frank Act.
    \23\ In addition, CEA Sec.  5(e)(2), which was added to the CEA 
by the CFMA, provides that the Commission, through notice and 
comment rulemaking, may allow futures and options in agricultural 
commodities to trade on DTEFs. Once the Dodd-Frank Act repeals the 
authority for DTEFs, Sec.  5(e)(2) will no longer have any practical 
effect.
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    The Dodd-Frank Act also contains several new provisions relating to 
agricultural commodities. Section 721(a)(21) of the Dodd-Frank Act adds 
a new Sec.  1a(47) to the CEA that defines the term ``swap.'' As part 
of the definition, clause (iii) of Sec.  1a(47)(A) provides that a swap 
includes ``any agreement, contract, or transaction commonly known as * 
* * an agricultural swap * * *.'' \24\ In addition, the Dodd-Frank 
Act's definition of swap includes commodity options, other than 
exchange-traded options on futures, thus requiring off-exchange options 
on agricultural commodities to be regulated as swaps.\25\
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    \24\ See new CEA Sec.  1a(47)(A)(iii)(XX) as added by Sec.  
721(a)(21) of the Dodd-Frank Act.
    \25\ See new CEA Sec.  1a(47)(A)(i) and new CEA Sec.  
1a(47)(B)(i) as added by Sec.  721(a)(21) of the Dodd-Frank Act:
    * * * SWAP.--
    (A) IN GENERAL.--Except as provided in subparagraph (B), the 
term `swap' means any agreement, contract, or transaction--
    (i) That is * * * [an] option of any kind that is for the 
purchase or sale * * * [of] commodities * * *.
    (B) EXCLUSIONS.--The term `swap' does not include--
    (i) any contract of sale of a commodity for future delivery (or 
option on such a contract) * * *.
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    Section 723(c)(3)(A) of the Dodd-Frank Act, which is a free-
standing provision that does not amend the CEA, contains a general rule 
that, except as provided in Sec.  723(c)(3)(B), ``no person shall offer 
to enter into, enter into, or confirm the execution of, any swap in an 
agricultural commodity (as defined by the [CFTC]).'' Section 
723(c)(3)(B) provides that a swap in an agricultural commodity may be 
permitted pursuant to the Commission's exemptive authority under CEA 
Sec.  4(c), ``or any rule, regulation, or order issued thereunder 
(including any rule, regulation, or order in effect as of the date of 
enactment of this Act) by the [CFTC] to allow swaps under such terms 
and conditions as the Commission shall prescribe.''
    Section 733 of the Dodd-Frank Act adds a new Sec.  5h to the CEA 
that governs the registration and regulation of swap execution 
facilities. New CEA Sec.  5h(b)(2) provides that a swap execution 
facility ``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.''
    Section 737 of the Dodd-Frank Act amends CEA Sec.  4a to direct the 
Commission to adopt position limits for futures, exchange-traded 
options, and swaps that are economically equivalent to futures and 
exchange-traded options within 180 days of the date of enactment of the 
Dodd-Frank Act for exempt commodities and within 270 days of the date 
of enactment of the Dodd-Frank Act for agricultural commodities.

B. Regulatory Framework

1. ``Agricultural Commodity'' in Current Regulations
    The term agricultural commodity appears in the Commission's 
regulations in multiple places, the most relevant of which are the 
rules for swaps and options.
a. Part 35 Swaps Exemption
    Regarding the pre Dodd-Frank Act swaps rules, Part 35 of the 
Commission's regulations provides a broad-based exemption for certain 
swap agreements. Adopted by the Commission under its Sec.  4(c) 
exemptive authority in 1993,\26\ Part 35 allows for swaps to transact 
bilaterally if certain conditions are met.\27\ As mentioned above, the 
CFMA swaps exemption, current CEA Sec. Sec.  2(d), 2(g) and 2(h), 
provided an even broader exemption for excluded and exempt commodities 
than that provided by Part 35. As a result, only swap transactions in 
agricultural commodities still rely on the exemption found in Part 35. 
With the exception of three outstanding Sec.  4(c) exemptions related 
to cleared agricultural basis and calendar swaps,\28\ Part 35 is the 
sole authority under which market participants may transact 
agricultural swaps that are not options--until such

[[Page 65589]]

time as the Commission issues other or different rules and regulations 
for agricultural swaps transactions.\29\
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    \26\ See 58 FR 5587 (Jan. 22, 1993). Note that because Part 35 
was implemented pursuant to a Sec.  4(c) exemption, agricultural 
swaps that rely on Part 35 for their legal authority will continue 
to be permitted under the Dodd-Frank language whereby existing 
agricultural swaps provisions adopted pursuant to Sec.  4(c), 
including Part 35, are grandfathered (See Dodd-Frank Sec.  
723(c)(3)(B)).
    \27\ The requirements are: (1) The swap agreements are entered 
into solely between eligible swap participants; (2) the swap 
agreements are not part of a fungible class of agreements that are 
standardized as to their material economic terms; (3) the 
creditworthiness of any party having an actual or potential 
obligation under the swap agreement must be a material consideration 
in entering into or determining the terms of the swap agreement, 
including pricing, cost, or credit enhancement terms; and (4) the 
swap agreement is not entered into and traded on or through a 
multilateral transaction execution facility. See id. at 5590-5591; 
see also 17 CFR 35.2(a)-(d).
    \28\ Part 35, at Sec.  35.2(d), also provides that ``any person 
may apply to the Commission for exemption from any of the provisions 
of the Act (except 2(a)(1)(B) [liability of principal for act of 
agent]) for other arrangements or facilities, on such terms and 
conditions as the Commission deems appropriate, including but not 
limited to, the applicability of other regulatory regimes.'' See 17 
CFR 35.2(d). The Commission has granted three such exemptions from 
Part 35, which have in each instance been styled as Sec.  4(c) 
exemptive orders. See:
    Order: (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act (a) Permitting Eligible Swap Participants To Submit for Clearing 
and ICE Clear U.S., Inc. and Futures Commission Merchants To Clear 
Certain Over-The- Counter Agricultural Swaps and (b) Determining 
Certain Floor Brokers and Traders To Be Eligible Swap Participants; 
and (2) Pursuant to Section 4d of the Commodity Exchange Act, 
Permitting Certain Customer Positions in the Foregoing Swaps and 
Associated Property To Be Commingled With Other Property Held in 
Segregated Accounts, 73 FR 77015 (Dec. 18, 2008);
    Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act, Permitting the Chicago Mercantile Exchange to Clear Certain 
Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d 
of the Commodity Exchange Act, Permitting Customer Positions in Such 
Cleared-Only Contracts and Associated Funds To Be Commingled With 
Other Positions and Funds Held in Customer Segregated Accounts, 74 
FR 12316 (March 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).
    \29\ See Agricultural Swaps, Advance Notice of Proposed 
Rulemaking and Request for Comment, 75 FR 59666 (September 28, 2010) 
(the ``Agricultural Swaps ANPRM'').
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b. Part 32 and Options
    The Commission maintains plenary authority over commodity options 
pursuant to CEA Sec.  4c(b). It has used that authority to, among other 
things, issue Part 32 of the Commission's regulations, which includes a 
general ban on off-exchange options.\30\ However, Part 32 allows for 
off-exchange option transactions under certain conditions, including 
allowing off-exchange options on agricultural commodities in two 
instances.\31\
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    \30\ See Commission regulation 32.11, 17 CFR 32.11.
    \31\ Note that Part 32 was not issued under the Commission's 
Sec.  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 
will fall within the CEA's definition of a swap. Accordingly, it is 
important to identify what options on agricultural commodities are 
currently being traded pursuant to Part 32.
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    Rule 32.13 establishes rules for trading off-exchange 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,\32\ the ATOM registration scheme has 
attracted only one registrant, which registrant has since withdrawn its 
ATOM registration. Accordingly, ATOs currently may only be transacted 
pursuant to an exemptive provision found at Sec.  32.13(g)(1). The 
exemption at Sec.  32.13(g)(1) allows ATOs to be sold when: (1) The 
option is offered to a commercial (``a producer, processor, or 
commercial user of, or a merchant handling'' the underlying commodity); 
(2) the commercial enters the transaction solely for purposes related 
to its business as such; and (3) each party to the option contract has 
a net worth of not less than $10 million.
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    \32\ 63 FR 18821 (April 16, 1998); and 64 FR 68011 (December 6, 
1999), respectively.
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    In either case (whether transacted pursuant to the ATOM 
registration scheme or accomplished via the ATO exemption at Sec.  
32.13(g)), the phrase ``agricultural trade option'' refers specifically 
to an off-exchange option on an enumerated agricultural commodity.
    In addition to the Sec.  32.13(g) ATO exemption, Part 32 includes, 
at Sec.  32.4, a basic trade option exemption applicable to options on 
commodities other than the enumerated agricultural commodities. The 
terms of the Sec.  32.4 exemption are essentially the same as those of 
the Sec.  32.13(g) exemption with one significant difference. Under 
Sec.  32.4, the option must be offered to a producer, processor, or 
commercial user of, or a merchant handling, the commodity, who enters 
into the commodity option transaction solely for purposes related to 
its business as such. However, Sec.  32.4 does not include any net 
worth requirement. Because the term ``agricultural commodity'' in the 
Act refers to more than just the enumerated commodities, the Commission 
recognizes that certain options authorized under Sec.  32.4 (e.g. off-
exchange options on coffee, sugar, cocoa, and other agricultural 
products that do not appear in the enumerated commodity list) will be 
considered to be swaps in an agricultural commodity--and subject to any 
Commission rules that specifically address agricultural swaps.
c. Other Regulations
    The definition of agricultural commodity will also apply to any 
other Commission regulation that references agricultural commodity and 
is not specifically limited to the enumerated agricultural 
commodities.\33\ However, the definition is not anticipated to have any 
significant substantive impact outside of the Part 35 swaps rules, the 
Part 32 options rules, and the position limit rulemaking that will 
address agricultural commodities (see discussion in next section).
---------------------------------------------------------------------------

    \33\ For example, see current Commission regulation 150.5(e)(3) 
(17 CFR 150.5(e)(3)), which applies to exchange-set speculative 
position limits for, among other things, the ``international soft 
agricultural products.'' Section 150.5 may be amended when the 
Commission adopts position limits for agricultural commodities 
pursuant to Sec.  737(a) of the Dodd-Frank Act.
---------------------------------------------------------------------------

2. ``Agricultural Commodity'' in New CFTC Regulations
    The definition of agricultural commodity will also be necessary in 
order to provide context for certain rulemakings under the Dodd-Frank 
Act. For example, if the Commission proceeds with an agricultural swaps 
rulemaking, the definition will identify the scope of commodities that 
will be subject to it.\34\ Any such rulemaking would provide rules and 
regulations governing the trading of swaps in an agricultural 
commodity. The definition will similarly provide a basis for the 
Commission's planned rulemaking addressing speculative position limits 
on agricultural commodities,\35\ and by reverse implication, 
speculative position limits on exempt commodities (defined as a 
commodity that is not an excluded commodity or an agricultural 
commodity)--i.e., once a definition of agricultural commodity is 
adopted, any commodity that does not fall within that definition, or 
the definition of excluded commodity, will be considered an exempt 
commodity.\36\
---------------------------------------------------------------------------

    \34\ See Sec. Sec.  723(c)(3) and 733 of the Dodd-Frank Act and 
the Agricultural Swaps ANPRM.
    \35\ See Sec.  737(a) of the Dodd-Frank Act.
    \36\ Id.
---------------------------------------------------------------------------

    Similarly, defining an agricultural commodity could clarify those 
swaps that are eligible for the exemptions in current CEA Sec.  2(g) 
and 2(h) (which are not available to swaps in agricultural 
commodities). As noted above, the Dodd-Frank Act provides for the 
eventual repeal of current CEA Sec.  2(g) and Sec.  2(h). However, if 
the definition of an agricultural commodity is made effective prior to 
the repeal of those provisions, it would provide greater certainty as 
to the proper scope of those provisions during the interim.

Part II--Explanation of the Definition

A. Terms of the Proposed Definition

    This notice of proposed rulemaking proposes to add the following 
definition to section 1.3, the Definitions section, of the Commission's 
regulations:

    As used in the Act and CFTC regulations, the term ``agricultural 
commodity'' means:
    (1) The following commodities specifically enumerated in the 
definition of a ``commodity'' found in section 1a of the Act: 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;
    (2) All other commodities that are, or once were, or are derived 
from, living organisms, including plant, animal and aquatic life, 
which are generally fungible, within their respective classes, and 
are used primarily for human food, shelter, animal feed, or natural 
fiber;
    (3) Tobacco, products of horticulture, and such other 
commodities used or consumed by animals or humans as the Commission 
may by rule, regulation, or order designate after notice and 
opportunity for hearing; and
    (4) Commodity-based contracts based wholly or principally on a 
single underlying agricultural commodity.

B. Explaining the Definition

Category One--Enumerated Agricultural Commodities
    Category one includes the ``enumerated agricultural commodities''

[[Page 65590]]

specified in current Sec.  1a(4) of the Act (renumbered as Sec.  1a(9) 
under the Dodd-Frank Act). While there is considerable overlap between 
categories one and two, category one includes some commodities that 
would not qualify under category two. For example, ``fats and oils'' 
would include plant-based oils, such as tung oil and linseed oil, which 
are used solely for industrial purposes (and thus would not fall within 
category two). Section 1a(4)'s reference to ``oils'' would not, 
however, extend to petroleum products.\37\
---------------------------------------------------------------------------

    \37\ Petroleum products clearly would not fall within the 
enumerated commodities. ``These itemized commodities are 
agricultural in nature.'' Philip McBride Johnson, Commodities 
Regulation, Sec.  1.01, p. 3 (1982). The Commission has never even 
considered treating petroleum products as agricultural commodities. 
Nor would petroleum products fall within the second category. Even 
though they could be viewed as derived from living organisms--albeit 
organisms that lived millions of years ago--such products would not 
qualify under the ``used primarily for human food, shelter, animal 
feed or natural fiber'' standard of category two.
---------------------------------------------------------------------------

Category Two: Operative Definition of Agricultural Commodities
    As a general matter, category 2 seeks to draw a line between 
products derived from living organisms that are used for human food, 
shelter, animal feed or natural fiber (covered by the definition) and 
products that are produced through processing plant or animal-based 
inputs to create products largely used as industrial inputs (outside 
the definition). In that context, some of the terms used in describing 
the second category require further clarification, particularly the 
terms, ``generally fungible,'' ``used primarily,'' ``human food'' and 
``natural fiber.''
    ``Generally fungible''--means substitutable or interchangeable 
within general classes. For example, apples, coffee beans, and cheese 
are generally fungible within general classes, even though there are 
various grades and types, and so they would be agricultural 
commodities. On the other hand, commodities that have been processed 
and have taken on a unique identity would not be generally fungible. 
Thus, while flax or mohair are generally fungible natural fibers, lace 
and linen garments made from flax, or sweaters made from mohair, are 
not generally fungible and would not be agricultural commodities under 
category two.
    ``Used primarily''--means any amount of usage over 50%. If 50% of 
the peaches harvested, plus one, are used for human food, then peaches 
fall within category two.
    ``Human food''--includes drink. Thus fruit juice, wine and beer are 
``food'' for purposes of the definition of ``agricultural commodity.''
    ``Natural fiber''--means any naturally occurring fiber that is 
capable of being spun into a yarn or made into a fabric by bonding or 
by interlacing in a variety of methods including weaving, knitting, 
braiding, felting, twisting, or webbing, and which is the basic 
structural element of textile products.
    Based on the foregoing, therefore, category two would include such 
products as: Fruits and fruit juices; vegetables and edible vegetable 
products; edible products of enumerated commodities, such as wheat 
flour and corn meal; poultry; milk and milk products, including cheese, 
nonfat dry milk and dry whey; distiller's dried grain; eggs; cocoa 
beans, cocoa butter and cocoa; coffee beans and ground coffee; 
sugarcane, sugar beets, beet pulp (used as animal feed), raw sugar, 
molasses and refined sugar; honey; beer and wine; shrimp; and silk, 
flax and mohair.
    Category two would also include stud lumber, plywood, strand board 
and structural panels because they are derived from living organisms 
(trees), are generally fungible (e.g., random length 2 x 4s and 4 x 8 
standard sheets of plywood) and are used primarily for human shelter--
i.e., in the construction of dwellings. Category two would not, 
however, include industrial inputs such as wood pulp, paper or 
cardboard, nor would it include raw rubber, turpentine or rosin. 
Although derived from living organisms--trees--and generally fungible, 
none of these products are used primarily for human food, shelter, 
animal feed or natural fibers. On the other hand, maple syrup and maple 
sugar, also derived from trees, would be ``agricultural commodities.'' 
Rayon, which is a fiber derived from trees or other plants, falls out 
of category two because it is not a natural fiber--i.e., it must be 
chemically processed from cellulose before it becomes fiber.
    Category two would include high fructose corn syrup, but not corn-
based products such as polylactic acid (a corn derivative used in 
biodegradable packaging), butanol (a chemical derived from cornstarch 
and used in plasticizers, resins, and brake fluid) or other plant-based 
industrial products. Category two would include pure ethanol, which is 
derived from living organisms (corn and other plants), is generally 
fungible, and may be used for human food (as an ingredient of alcoholic 
beverages). However, it would not include denatured ethanol, which is 
used for fuel and for other industrial uses, because denatured ethanol 
cannot be used for human food. Likewise, neither would Category 2 
include other plant or animal based renewable fuels, such as methane or 
biodiesel. Fertilizer and other agricultural chemicals, even though 
they are used almost exclusively in agriculture, would not fall within 
the definition because they would not fit into the food, shelter, 
animal feed or natural fiber category.
Category Three--Other Agricultural Commodities
    Category three would include commodities that do not readily fit 
into the first two categories, but would nevertheless be widely 
recognized as commodities of an agricultural nature. Such commodities 
would include, for example, tobacco, products of horticulture (e.g., 
ornamental plants), and such other commodities used or consumed by 
animals or humans as the Commission may by rule, regulation or order 
designate after notice and opportunity for hearing. The Commission 
would determine the status of any such other commodities for purposes 
of the Act and CFTC regulations on a case-by-case basis as questions 
arise in the context of specific markets or transactions.
Category Four--Commodity-Based Contracts
    The term, ``agricultural commodity,'' also covers contracts that 
are based wholly or principally on a single underlying agricultural 
commodity. Such contracts do not necessarily involve the potential for 
physical delivery of the underlying agricultural commodity--for example 
basis swaps, calendar swaps or crop yield swaps. The commodity-based 
contracts category would also include an index based wholly or 
principally on a single underlying agricultural commodity. Thus, for 
example, the Minneapolis Grain Exchange (``MGE'') wheat, corn and 
soybean price index contracts \38\ would be considered agricultural 
commodities. Also, any index made up of more than 50% of any single 
agricultural commodity, since it is based principally on a single 
underlying agricultural commodity, would be considered a commodity-
based contract for purposes of including it within the agricultural 
commodity definition.
---------------------------------------------------------------------------

    \38\ The MGE agricultural index products are currently available 
for corn, soybeans, and various types of wheat. These index products 
are financially settled to a spot index of country origin pricing as 
calculated by a firm called Data Transmission Network (``DTN''). 
Cash settlement is based upon the simple average of the spot prices 
published on the last three trading days of the settlement month.
---------------------------------------------------------------------------

    For purposes of the commodity-based contract category, the soybean 
complex

[[Page 65591]]

would be considered a single commodity, so that an index based on the 
prices of soybeans, soybean meal and soybean oil would be an 
agricultural commodity under this provision. Likewise, for purposes of 
this provision, wheat would be considered a single commodity, so that 
an index based on the prices of Chicago Board of Trade (``CBT'') soft 
red winter wheat, Kansas City Board of Trade (``KCBT'') hard red winter 
wheat and MGE hard red spring wheat would be an agricultural commodity 
under the commodity-based contract provision.
    On the other hand, a contract based on an index of the prices of 
multiple agricultural commodities would not be based wholly or 
principally on a single agricultural commodity and would not fall 
within the commodity-based contract category. Thus, for example, under 
the commodity-based contract provision, a swap contract based on a 
price index of equal parts wheat, corn and soybeans, or even a swap 
based on a price index of 50% corn and 50% wheat, would not be based 
wholly or principally on a single underlying agricultural commodity and 
so would not fall within the agricultural commodity definition. 
Therefore, such index-based swaps would not be subject to special rules 
(if any) that might be adopted for agricultural commodity swaps.\39\
---------------------------------------------------------------------------

    \39\ See the Agricultural Swaps ANPRM.
---------------------------------------------------------------------------

    The definition of an ``excluded commodity'' in current CEA Sec.  
1a(13)(iii) \40\ could be read to include any index of agricultural 
commodities. That definition provides that ``excluded commodity'' 
means, among other things, ``any economic or commercial index based on 
prices, rates, values, or levels that are not within the control of any 
party to the relevant contract, agreement, or transaction.'' However, 
such a reading would frustrate the requirement in Dodd-Frank that swaps 
in agricultural commodities be permitted only pursuant to a Sec.  4(c) 
order of the Commission. For example, a swap contract based on a price 
index of solely wheat should reasonably be considered as a swap in 
agricultural commodity. Applying a mechanical interpretation of the 
definition of excluded commodity could permit ``gaming'' by allowing an 
index based principally, or even overwhelmingly, on one agricultural 
commodity to evade the limitations on trading agricultural swaps that 
are found in the Dodd-Frank Act. For this reason, the definition 
proposed herein would include an index based wholly or principally on a 
single underlying agricultural commodity.
---------------------------------------------------------------------------

    \40\ New Sec.  1a(19)(iii) as renumbered under the Dodd-Frank 
Act.
---------------------------------------------------------------------------

Onions
    Onions present a unique case in that onions are the only 
agricultural product specifically excluded from the enumerated 
commodities list in current Sec.  1a(4). Also, Public Law 85-839 
prohibits the trading of onion futures on any board of trade in the 
United States.\41\ Nothing in the definition proposed herein affects 
the prohibition on onion futures trading.
---------------------------------------------------------------------------

    \41\ 7 U.S.C. 13-1.
---------------------------------------------------------------------------

    In defining an agricultural commodity, given the foregoing 
statutory history, as well as the Act's grammatical construction, it 
would appear that ``agricultural commodity'' is a subset of 
``commodity'' and, since onions are excluded from the definition of 
``commodity,'' onions cannot be considered an ``agricultural 
commodity.'' However, under the Dodd-Frank Act, the definition of 
``swap'' in new Sec.  1a(47) of the CEA is not limited to transactions 
based upon ``commodities'' as defined in current Sec.  1a(4) of the 
Act. Therefore, under the CEA as amended by Dodd-Frank, a swap may be 
based upon an item that is not defined as a ``commodity.'' Thus, onion 
swaps would seem to be permissible, but would not be considered to be 
swaps in an ``agricultural commodity'' under the definition proposed 
herein.

C. Effects of Applying the Definition

    It is also important to consider the uses to which the definition 
will be put--i.e., what would be the practical effect of a commodity 
being classified as an ``agricultural commodity'' under the definition 
proposed herein? One effect is that the commodity would be covered by 
any rules the Commission ultimately adopts for agricultural swaps. If, 
based on the comments received on the Agricultural Swaps ANPRM,\42\ it 
is determined that agricultural swaps should be treated the same as 
other physical commodity swaps, the definition will have no effect in 
the agricultural swaps context.
---------------------------------------------------------------------------

    \42\ See Agricultural Swaps, Advance Notice of Proposed 
Rulemaking and Request for Comment, 75 FR 59666 (September 28, 
2010).
---------------------------------------------------------------------------

    The other significant effect of a commodity being classified as an 
``agricultural commodity'' is that the commodity would be subject to 
the speculative position limits for agricultural commodities,\43\ 
rather than the speculative limits for exempt commodities. Again, the 
classification of a given commodity as ``agricultural'' vs. ``exempt'' 
should have no practical effect on the commodity or how it is traded in 
the speculative limits context because: (1) The definition will only 
apply to commodities that are the subject of actual swaps or futures 
trading; and (2) the speculative limits for any such commodities will 
be based not on any general across-the-board definition or principle, 
but on the individual characteristics of each commodity, its swaps/
futures market and its underlying cash market.
---------------------------------------------------------------------------

    \43\ The Commission is required to adopt speculative position 
limits for agricultural commodities within 270 days of the adoption 
of the Dodd-Frank Act.
---------------------------------------------------------------------------

    Also, as noted above, during the interim period until Sec. Sec.  
2(g) and 2(h) are repealed, any commodities falling within the new 
``agricultural commodity'' definition could not legally be traded 
pursuant to either section (although Part 35 would still be available 
to commodities/contracts meeting its requirements).

Part III--Request for Comments Regarding the Proposed Definition

    The Commission requests comments on any aspect of the agricultural 
commodity definition proposed herein, and also on the following 
specific questions:
    (1) Are there any commodities that do not fit within the terms of 
the definition proposed herein, but which nevertheless should be 
considered to be ``agricultural commodities'' for purposes of the CEA 
and Commission regulations? If so, why, and what undesirable effects, 
if any, might result from omitting such commodities from the 
definition?
    (2) Are there any commodities that do fit within the terms of the 
definition proposed herein, but which nevertheless should not be 
considered to be ``agricultural commodities'' for purposes of the CEA 
and Commission regulations? If so, why, and what undesirable effects, 
if any, might result from including such commodities in the definition?
    (3) Does the definition's proposed treatment of commodity-based 
contracts, including index contracts, for purposes of the agricultural 
commodity definition constitute an appropriate mechanism for 
classifying such contracts? If not, what other treatment would be a 
better alternative?
    (4) Are biofuels, such as methane and biodiesel, appropriately 
excluded from the agricultural commodity definition? If not, why should 
such products be included in the definition and what undesirable 
effects, if any, might result from omitting them from the definition?
    (5) Under the proposed definition, lumber, plywood and other 
products of

[[Page 65592]]

trees used in human shelter would fall within the agricultural 
commodity definition, whereas products of trees used as industrial 
inputs, such as wood pulp, paper, raw rubber and turpentine, would fall 
outside the definition. Does this formulation draw an appropriate 
dividing line between the products of trees that are covered by the 
agricultural commodity definition and those that are not?
    (6) As noted above, if the definition of an agricultural commodity 
is made effective upon the publication of a final rule, it would 
provide clarity as to what swaps are or are not eligible for the 
exemptions found in current CEA Sec. Sec.  2(g) and 2(h) until the 
point at which their repeal by the Dodd-Frank Act becomes effective. Is 
there any reason not to make the definition of agricultural commodity 
effective upon the publication of a final rule? Are there swaps 
currently being transacted under Sec.  2(g) or Sec.  2(h) that would be 
considered transactions in an agricultural commodity (and thus 
potentially, temporarily illegal) under the definition proposed herein? 
If so, should the effective date of the definition be postponed until 
the repeal of current CEA Sec. Sec.  2(g) and 2(h), for all purposes 
other than for the setting of speculative position limits, which will 
become effective prior to the repeal?

Part IV--Related Matters

A. Paperwork Reduction Act

    The proposed rule will not impose any new recordkeeping or 
information collection requirements, or other collections of 
information that require approval of the Office of Management and 
Budget under the Paperwork Reduction Act.\44\ The Commission invites 
public comment on the accuracy of its estimate that no additional 
recordkeeping or information collection requirements or changes to 
existing collection requirements would result from the rules proposed 
herein.
---------------------------------------------------------------------------

    \44\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

B. Cost Benefit Analysis

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before issuing new regulations under 
the Act. Section 15(a) does not require the Commission to quantify the 
costs and benefits of new regulations or to determine whether the 
benefits of adopted regulations outweigh their costs. Rather, section 
15(a) requires the Commission to consider the costs and benefits of the 
subject regulations 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 the market for 
listed derivatives; (3) price discovery; (4) sound risk management 
practices; and (5) other public interest considerations. The Commission 
may, in its discretion, give greater weight to any one of the five 
enumerated areas of concern and may, in its discretion, determine that, 
not withstanding its costs, a particular regulation is necessary or 
appropriate to protect the public interest.
    Defining an agricultural commodity for purposes of the CEA would 
seem to have limited immediate practical effects. However, the 
definition will be necessary for later substantive rulemakings, such as 
setting speculative position limits for exempt and agricultural 
commodities under Sec.  737 of the Dodd-Frank Act and determining the 
permissibility of trading agricultural swaps under Sec.  723(c)(3) and 
Sec.  733 of the Dodd-Frank Act. Accordingly, this analysis will focus 
on the prospective costs/benefits of defining ``agricultural 
commodity.''
    As noted above, Sec.  737(a) of the Dodd-Frank Act amends CEA Sec.  
4a(a) to direct the Commission to adopt speculative position limits for 
futures, exchange-traded options, and swaps that are economically 
equivalent to futures and exchange-traded options within 180 days of 
the date of enactment of the Dodd-Frank Act for exempt commodities and 
within 270 days of the date of enactment of the Dodd-Frank Act for 
agricultural commodities. Under CEA Sec.  4a(a)(3), the Commission in 
setting position limits must balance the goals of: (1) Diminishing, 
eliminating, or preventing excessive speculation; (2) deterring and 
preventing market manipulation, squeezes, and corners; (3) ensuring 
sufficient liquidity for bona fide hedgers; and (4) ensuring that the 
price discovery function of the underlying market is not disrupted. If 
speculative position limits for exempt and agricultural commodities are 
set at an inappropriate level, it could have the consequence of not 
achieving the optimum blend of these important goals and could be 
detrimental to the competitiveness and financial integrity of these 
markets.
    As noted above, Sec.  723(c)(3) of the Dodd-Frank Act contains a 
general rule that ``no person shall offer to enter into, or confirm the 
execution of, any swap in an agricultural commodity (as defined by the 
[CFTC]).'' Section 723(c)(3) contains an exception to that general rule 
that provides that a swap in an agricultural commodity may be permitted 
pursuant to the Commission's exemptive authority under CEA Sec.  4(c), 
``or any rule, regulation, or order issued thereunder (including any 
rule, regulation, or order in effect as of the date of enactment of 
this Act) by the [CFTC] to allow swaps under such terms and conditions 
as the Commission shall prescribe.''
    Also as noted above, Sec.  733 of the Dodd-Frank Act adds a new 
Sec.  5h to the CEA that governs the registration and regulation of 
swap execution facilities. New CEA Sec.  5h(b)(2) provides that a swap 
execution facility ``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.''
    Both Sec.  723 and Sec.  733 require the Commission to define an 
agricultural commodity if agricultural swaps (beyond those currently 
allowed under CEA Sec.  4(c) exemptions) are to be traded. If the 
Commission decides to promulgate a rule permitting additional types of 
agricultural swaps to trade, such a rule could enhance price discovery 
and improve risk management for the agricultural commodities involved.
    The Commission invites public comments on its cost-benefit 
considerations. Commenters also are 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.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \45\ 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. The rules proposed by the Commission provide a definition that 
will largely be used in future rulemakings and which, by itself, 
imposes no significant new regulatory requirements. 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 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \45\ 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

List of Subjects in 17 CFR Part 1

    Definitions, Agriculture, Agricultural commodity.

    In consideration of the foregoing, and pursuant to the authority 
contained in

[[Page 65593]]

the Commodity Exchange Act and, in particular, sections 2(a)(1), 5h, 
and 8a thereof, 7 U.S.C. 2, 7b-3, and 12a, and pursuant to the 
authority contained in section 723(c)(3) of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 
(2010), the Commission hereby proposes to amend Chapter 1 of Title 17 
of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 is revised to read as follows:

    Authority:  7 U.S.C. 1a, 2, 5, 6, 6a-6p, 7, 7a, 7b, 7b-3, 8, 9, 
12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24, unless 
otherwise noted.

    2. Section 1.3 is amended by adding paragraph (zz) to read as 
follows:


Sec.  1.3  Definitions.

* * * * *
    (zz) Agricultural commodity. As used in the Act and CFTC 
regulations, this term means:
    (1) The following commodities specifically enumerated in the 
definition of a ``commodity'' found in section 1a of the Act: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;
    (2) All other commodities that are, or once were, or are derived 
from, living organisms, including plant, animal and aquatic life, which 
are generally fungible, within their respective classes, and are used 
primarily for human food, shelter, animal feed or natural fiber;
    (3) Tobacco, products of horticulture, and such other commodities 
used or consumed by animals or humans as the Commission may by rule, 
regulation or order designate after notice and opportunity for hearing; 
and
    (4) Commodity-based contracts based wholly or principally on a 
single underlying agricultural commodity.

    Issued in Washington, DC, on October 19, 2010, by the 
Commission.
David A. Stawick,
Secretary of the Commission.

Statement of Chairman Gary Gensler

Agriculture Commodity Definition

October 19, 2010

I support the proposal to publish for comment a definition of the term, 
``agricultural commodity.'' This is necessary as the Dodd-Frank Act 
includes two provisions that apply to swaps in an agricultural 
commodity, as defined by the CFTC. First, the definition will be used 
to fulfill the Dodd-Frank Act's requirement that swaps in an 
``agricultural commodity'' be prohibited unless permitted under the 
Commission's general exemptive authority. An Advance Notice of Proposed 
Rulemaking seeking comment on the appropriate conditions, restrictions 
or protections to be included in any rules governing agricultural swaps 
is currently out for comment. Second, the Dodd-Frank Act directs the 
Commission to adopt speculative position limits for ``agricultural 
commodities'' within 270 days of the enactment of Dodd-Frank.

I believe the proposed agricultural commodity definition draws a good 
line between agricultural and non-agricultural commodities, though I am 
very interested to hear the public's views on this definition.

[FR Doc. 2010-26951 Filed 10-25-10; 8:45 am]
BILLING CODE P


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