Commodity Futures Trading Commission.
Advanced notice of proposed rulemaking and request for comment.
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”). Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an “agricultural commodity” (as defined by the Commission) are prohibited unless entered into pursuant to a rule, regulation or order of the Commission adopted pursuant to section 4(c) of the Commodity Exchange Act (“CEA” or “Act”). This advance notice of proposed rulemaking (“ANPRM”) requests comment on the appropriate conditions, restrictions or protections to be included in any such rule, regulation or order governing the trading of agricultural swaps.
Comments must be received on or before October 28, 2010. The Commission is not inclined to grant extensions of this comment period.
You may submit comments, identified with “Agricultural Swaps ANPRM” in the subject line, by any of the following methods:
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All comments must be submitted in English, or if not, accompanied by an English translation. All comments provided in any electronic form or on paper will be published on the CFTC Web site, without review and without removal of personally identifying information. All comments are subject to the CFTC privacy policy.
Donald Heitman, Senior Special Counsel, (202) 418–5041,
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an “agricultural commodity” (as defined by the Commission) are prohibited unless entered into pursuant to a rule, regulation or order of the Commission adopted pursuant to § 4(c) of the Commodity Exchange Act. This ANPRM reviews the current statutory and regulatory framework governing agricultural swaps, as well as the Dodd-Frank Act provisions applicable to agricultural swaps. The ANPRM then requests comment on the appropriate conditions, restrictions or protections to be included in any Commission rule, regulation or order governing the trading of agricultural swaps.
Since 2000, bilateral over-the-counter (“OTC”) swaps
Excluded swap transactions.
No provision of this chapter (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 § 2(g), 7 U.S.C. 2(g).
While the term “agricultural commodity” is not specifically defined in the Act, it is used in the Act in conjunction with the definition of the term “exempt commodity,” which is defined as neither an “agricultural commodity” nor an “excluded commodity.”
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.
The effect of excluding agricultural commodities from current CEA § 2(g) was that swaps involving exempt and excluded commodities were allowed to transact largely outside of the Commission's jurisdiction or oversight, while swaps involving agricultural commodities, including both the enumerated agricultural commodities and other non-enumerated agricultural commodities, remained subject to the Commission's pre-CFMA swaps regulations as set forth in 17 CFR part 35.
The Dodd-Frank Act defines the term “swap” to include not only the various types of swaps listed in the definition, including commodity swaps and agricultural swaps, but also OTC options of any kind.
Regulated option trading
No person shall offer to enter into, enter into or confirm the execution of, any transaction involving any commodity regulated under this Act which is of the character of, or is commonly known to the trade as, an “option”, “privilege”, “indemnity”, “bid”, “offer”, “put”, “call”, “advance guaranty”, or “decline guaranty”, contrary to any rule, regulation, or order of the Commission prohibiting any such transaction or allowing any such transaction under such terms and conditions as the Commission shall prescribe. Any such order, rule, or regulation may be made only after notice and opportunity for hearing, and the Commission may set different terms and conditions for different markets. CEA § 4c(b); 7 U.S.C. 6c(b).
As mentioned previously, Part 35 of the Commission's regulations provides a broad-based exemption for certain swap agreements. Adopted by the Commission under its § 4(c) exemptive authority in 1993,
After the CFMA amendments to the CEA, which excluded swaps on “exempt” and “excluded” commodities from virtually all of the Commission's jurisdiction, Part 35 remained relevant only for agricultural swaps. With the exception of three outstanding § 4(c) exemptions related to cleared agricultural basis and calendar swaps,
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).
As noted above, the Commission maintains plenary authority over options pursuant to CEA § 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 OTC options,
Rule 32.13 establishes rules for trading OTC 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,
In either case (whether transacted pursuant to the ATOM registration scheme or accomplished via the exemption at § 32.13(g)), the phrase “agricultural trade option” refers specifically to an OTC option on an enumerated agricultural commodity.
In addition to the § 32.13(g) ATO exemption, Part 32 includes, at § 32.4, a basic trade option exemption applicable to options on commodities other than the enumerated agricultural commodities. The terms of the § 32.4 exemption are essentially the same as those of the § 32.13(g) exemption with one significant difference. Under § 32.4, the option must be offered to a producer, processor, or commercial user of, or a merchant handling, the commodity, who enters into the commodity option transaction solely for purposes related to its business as such. However, § 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 § 32.4 (
Under the CEA, as amended by the Dodd-Frank Act, only eligible contract participants (“ECPs”)
New CEA § 2(h), as added by § 723(a)(3) of the Dodd-Frank Act, establishes a clearing requirement for
Section 731 of the Dodd-Frank Act adds a new § 4s to the CEA that provides for the registration and regulation of swap dealers and major swap participants.
Section 737 of the Dodd-Frank Act amends current CEA § 4a regarding position limits. Under the Dodd-Frank provisions, the Commission must 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.
Under § 723(c)(3) of the Dodd-Frank Act, swaps in an “agricultural commodity” (as defined by the Commission) are prohibited unless the swap is entered into pursuant to an exemption granted under CEA § 4(c). Generally speaking, § 4(c) provides that, in order to grant an exemption, the Commission must determine that: (1) The exemption would be consistent with the public interest and the purposes of the CEA; (2) any agreement, contract, or transaction affected by the exemption would be entered into by “appropriate persons” as defined in § 4(c); and (3) any agreement, contract, or transaction affected by the exemption would not have a material adverse effect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under the CEA.
Section 723(c)(3) includes a “grandfather” clause that provides that any rule, regulation, or order regarding agricultural swaps that was issued pursuant to § 4(c), and that was in effect on the date of enactment of the Dodd-Frank Act, would continue to be permitted. Such rules, regulations or orders would include Part 35 with respect to agricultural swaps and the agricultural basis and calendar swaps noted above, but would not include options entered into pursuant to Part 32.
As noted above, § 723(c)(3) of the Dodd-Frank Act applies to any swap in an agricultural commodity “as defined by the Commodity Futures Trading Commission.” The Commission plans to publish a proposed definition of the term “agricultural commodity” in the near future. That proposed definition will cover all such commodities that are, or could in the future be, traded pursuant to a swap or futures contract. However, for purposes of commenting on this ANPRM, commenters may assume that “agricultural commodity” includes the following commodities that are currently the subject of derivatives trading, whether listed for trading on a futures exchange or traded bilaterally OTC: (1) The enumerated commodities that are listed in current § 1a(4) of the CEA (
Section 723(c)(3) of the Dodd-Frank Act and CEA § 4(c) authorize the Commission to impose such terms and conditions as it deems appropriate in order for a person to enter into or execute an agricultural swap. The Commission is requesting input on the following questions:
1. How big is the current agricultural swaps business—including both agricultural swaps trading under current part 35 and ATOs under §§ 32.4 and 32.13(g) of the Commission's regulations?
2. What types of entities are participating in the current agricultural swaps business?
3. Are agricultural swaps/ATO participants significantly different than the types of entities participating in other physical commodity swaps/trade options?
4. What percentage of existing agricultural swaps trading is cleared vs. non-cleared?
5. What percentage of existing agricultural swaps would be eligible for the commercial end-user exemption from the mandatory clearing requirement?
6. What percentage of trading would be subject to the Dodd-Frank clearing requirement, if that requirement applied automatically to agricultural swaps (other than those eligible for the commercial end-user exemption)?
7. What would be the practical and economic effect of a rule requiring agricultural swaps transactions (other than those eligible for the commercial end-user exemption) generally to be cleared? The Commission is interested in the views of agricultural swaps market participants (both users and swap dealers) regarding a potential clearing requirement for agricultural swaps.
8. What would be the practical and economic effect of requiring agricultural swaps to be cleared under the Dodd-Frank clearing regime?
9. Have current agricultural swaps/ATO participants experienced any significant trading problems, including: (a) economic problems (
10. Do agricultural swaps/ATO purchasers need more protections than
11. If so, why, and what should those protections be?
12. Would additional protections for agricultural swaps purchasers unduly restrict their risk management opportunities?
13. Should the Commission consider rules to make it easier for agricultural producers to participate in agricultural swaps—for example, by allowing producers who do not qualify as ECPs to purchase agricultural swaps?
14. Should agricultural swaps transactions be permitted to trade on DCMs to the same extent as all other swaps are permitted on DCMs?
15. If yes, why?
16. If no, what other requirements, conditions or limitations should apply?
17. Should agricultural swaps transactions be permitted on SEFs to the same extent as all other swaps are permitted to transact on SEFs?
18. If yes, why?
19. If no, what other requirements, conditions or limitations should apply?
20. Should agricultural swaps be permitted to trade outside of a DCM or SEF to the same extent as all other swaps?
21. If yes, why?
22. If no, what other requirements, conditions or limitations should apply?
23. Should agricultural swaps be permitted to trade outside of a DCM or SEF to a different extent than other swaps due to the nature of the products and/or participants in the agricultural swaps market?
24. In general, should agricultural swaps be treated like all other physical commodity swaps under Dodd-Frank?
25. If yes, why?
26. If no, are there any additional requirements, conditions or limitations not already discussed in other answers that should apply?
27. If agricultural swaps are generally treated like swaps in other physical commodities, are there specific agricultural commodities that would require special or different protections?