2012-9888
Federal Register, Volume 77 Issue 82 (Friday, April 27, 2012)[Federal Register Volume 77, Number 82 (Friday, April 27, 2012)]
[Rules and Regulations]
[Pages 25320-25344]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9888]
[[Page 25319]]
Vol. 77
Friday,
No. 82
April 27, 2012
Part IV
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Parts 3, 32, and 33
Commodity Options; Final Rule and Interim Final Rule
Federal Register / Vol. 77 , No. 82 / Friday, April 27, 2012 / Rules
and Regulations
[[Page 25320]]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 3, 32, and 33
RIN 3038-AD62
Commodity Options
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule and interim final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is issuing a final rule to repeal and replace the
Commission's current regulations concerning commodity options. The
Commission is also issuing an interim final rule (with a request for
additional comment) that incorporates a trade option exemption into the
final rules for commodity options (added Sec. 32.3). For a transaction
to be within the trade option exemption, the option, the offeror
(seller), and the offeree (buyer), as applicable, must satisfy certain
eligibility requirements, including that the option, if exercised, be
physically settled, that the option seller meet certain eligibility
requirements, and that the option buyer be a commercial user of the
commodity underlying the option, and certain other regulatory
conditions. Only comments pertaining to the interim final rule will be
considered in any further action related to these rules.
DATES: Effective date: The effective date for this final rule and the
interim final rule June 26, 2012.
Comment date: Comments on Sec. 32.3, the interim final rule
portion of this document, must be received on or before June 26, 2012.
Compliance date: For compliance dates for these final rules, see
SUPPLEMENTARY INFORMATION at section IV(D), below.
ADDRESSES: You may submit comments, identified by RIN number 3038-AD62,
by any of the following methods:
Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments
through the Web site.
Mail: David A. Stawick, Secretary of the Commission,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
Courier: Same as mail above.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Please submit your comments using only one method.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
http://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish the CFTC to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in Sec. 145.9 of the CFTC's regulations.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9.
---------------------------------------------------------------------------
The CFTC 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 this action 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, [email protected], Division of Market
Oversight; Ryne Miller, Attorney Advisor, (202) 418-5921,
[email protected], Division of Market Oversight; or David Aron, Counsel,
(202) 418-6621, [email protected], Office of the General Counsel,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Dodd-Frank Act
B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule
and Interim Final Rule
II. Commodity Options Background
A. Commission's Plenary Statutory Authority Over Commodity
Options
B. The NPRM Proposed an Overhaul of Existing Commodity Options
Regulations
III. Comments on the Commodity Options Proposal in the NPRM
A. Request for Comment on the NPRM
B. Summary of Comments on the NPRM
1. General Overview
2. Comments on the Commodity Options Proposal
a. Whether the Definition of Swap Includes Commodity Options
b. Trade Option Exemption
c. Eligible Contract Participants and Trade Options
d. FERC-Regulated Transactions
e. Deleting the Dealer Option Provisions
f. Deleting the Agricultural Trade Option Provisions
g. Options Fraud Provisions
IV. Explanation of the Final Rule and Interim Final Rule for
Commodity Options
A. Introduction
B. Sections Unchanged From the NPRM
C. New Part 32
1. Final Rule
2. Interim Final Rule; Trade Option Exemption
a. Exemption From General Swaps Rules
b. Offeror
c. Offeree
d. Physical Commodity Option
e. Trade Option Exemption Conditions
i. Recordkeeping Pursuant to Part 45
ii. Reporting Pursuant to Part 45
iii. Annual Notice Filing Alternative to Part 45 Reporting; Form
TO
iv. Specific Request for Comment on Trade Option Reporting and/
or Notice Filing Requirements
v. Swaps Large Trader Reporting; Position Limits
vi. SD/MSP Conditions
vii. Enforcement Provisions
viii. General Exemptive Authority Retained
D. Effective Date; Compliance Date
V. Interim Final Rule Matters
VI. Request for Comment on Interim Final Rule
VII. Related Matters
A. Cost Benefit Considerations
1. Background
2. Statutory Mandate To Consider the Costs and Benefits of the
Commission's Action: CEA Section15(a)
3. Benefits and Costs of the Final Rule
a. Benefits
b. Costs
4. Interim Final Rule Benefits and Costs
a. Benefits
b. Costs
c. Costs and Benefits as Compared to Alternatives
5. Section 15(a) Factors (of the Final Rule and Interim Final
Rule as a Whole)
a. Protection of Market Participants and the Public
b. Efficiency, Competitiveness, and Financial Integrity of the
Markets
c. Price Discovery
d. Sound Risk Management Procedures
e. Other Public Interest Considerations
6. Request for Comment on CBC in Connection With Interim Final
Rule
B. Regulatory Flexibility Analysis
1. DCMs, DCOs, FCMs, CPOs, Large Traders, ECPs, and ESPs
2. SDs, MSPs, SEFs, and SDRs
3. Entities Eligible To Engage in Options on Physical
Commodities on DCMs Under Part 33
4. Entities Engaged in Options Under Sec. 32.13(g)
5. Entities Engaged in Options Under existing Sec. 32.4
C. Paperwork Reduction Act
VIII. Final Rule and Interim Final Rule
I. Introduction
A. Dodd-Frank Act
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act
[[Page 25321]]
(``Dodd-Frank Act'').\2\ Title VII of the Dodd-Frank Act \3\ amended
the Commodity Exchange Act (``CEA'' or ``Act'') \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 (``SDs'') and major swap
participants (``MSPs''); (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.
---------------------------------------------------------------------------
\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 section 701 of the Dodd-Frank Act, Title VII may
be cited as the ``Wall Street Transparency and Accountability Act of
2010.''
\4\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule and
Interim Final Rule
Section 721 of the Dodd-Frank Act added new section 1a(47) to the
CEA, defining ``swap'' to include not only ``any agreement, contract,
or transaction commonly known as,'' among other things, ``a commodity
swap,'' \5\ but also ``[an] option of any kind that is for the purchase
or sale, or based on the value, of 1 or more * * * commodities * * *.''
\6\ As a result of the Dodd-Frank changes, on February 3, 2011, the
Commission published in the Federal Register a notice of proposed
rulemaking (``NPRM'') that included proposed regulations for commodity
options.\7\ This final rule and interim final rule relates to the
commodity options proposal in the NPRM. In particular, the final rule
issued herein adopts the Commission's proposal to generally permit
market participants to trade commodity options, which are statutorily
defined as swaps,\8\ subject to the same rules applicable to every
other swap. The interim final rule adopted herein includes a trade
option exemption for physically delivered commodity options purchased
by commercial users of the commodities underlying the options, subject
to certain conditions. This final rule and interim final rule also
renumbers the commodity options rules, as compared to the proposal in
the NPRM, and deletes a provision from the proposed rules that the
Commission has determined is no longer relevant.
---------------------------------------------------------------------------
\5\ 7 U.S.C. 1a(47)(A)(iii)(XXII).
\6\ See 7 U.S.C. 1a(47)(A)(i). Note that the swap definition
excludes options on futures (which must be traded on a DCM pursuant
to part 33 of the Commission's regulations) (see CEA section
1a(47)(B)(i), 7 U.S.C. 1a(47)(B)(i)), but it includes options on
physical commodities (whether or not traded on a DCM) (see CEA
section 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i)). Other options excluded
from the statutory definition of swap are options on any security,
certificate of deposit, or group or index of securities, including
any interest therein or based on the value thereof, that is subject
to the Securities Act of 1933 and the Securities Exchange Act of
1934 (see CEA section 1a(47)(B)(iii), 7 U.S.C. 1a(47)(B)(iii)) and
foreign currency options entered into on a national securities
exchange registered pursuant to section 6(a) of the Securities
Exchange Act of 1934 (see CEA section 1a(47)(B)(iv), 7 U.S.C.
1a(47)(B)(iv)). Note also that the Commission's regulations define a
commodity option transaction or commodity option as ``any
transaction or agreement in interstate commerce which is or is held
out to be of the character of, or is commonly known to the trade as,
an `option,' `privilege,' `indemnity,' `bid,' `offer,' `call,'
`put,' `advance guaranty' or `decline guaranty'.'' 17 CFR 1.3(hh).
For purposes of this release, the Commission uses the term
``commodity options'' to apply solely to commodity options not
excluded from the swap definition set forth in CEA section
1a(47)(A), 7 U.S.C. 1a(47)(A). As will be discussed in greater
detail below, the Commission is undertaking a definitions rulemaking
in conjunction with the Securities and Exchange Commission (``SEC'')
to further define, among other things, the term ``swap.'' See
Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, 76 FR 29818, May 23, 2011 (``Product
Definitions NPRM''). The final rule and interpretations that result
from the Product Definitions NPRM will address the determination of
whether a commodity option or a transaction with optionality is
subject to the swap definition in the first instance. If a commodity
option or a transaction with optionality is excluded from the scope
of the swap definition, as further defined by the Commission and the
SEC, the final rule and/or interim final rule adopted herein are not
applicable.
\7\ Commodity Options and Agricultural Swaps, 76 FR 6095, Feb.
3, 2011. Note that in addition to proposed commodity options rules,
the NPRM also included proposed rules for agricultural swaps. The
agricultural swaps rules were adopted by the Commission via a final
rulemaking published on August 10, 2011 and are not addressed
herein. See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011 (``Final
Agricultural Swaps Rules'').
\8\ See note 6, above.
---------------------------------------------------------------------------
As noted above, because the Dodd-Frank Act definition of swap
includes commodity options, the NPRM proposed provisions that would
substantially amend the Commission's regulations regarding such
commodity option transactions. The proposed rules for commodity
options, including proposed amendments to parts 3, 32, and 33,
generally included provisions that would have subjected all commodity
options that are swaps to the same rules applicable to any other swap.
After thoroughly reviewing the comments submitted in response to the
NPRM, the Commission has determined to issue the commodity options
rules proposed in the NPRM as final rules, with certain non-substantive
amendments, including the deletion of a ``prompt execution''
requirement and other requirements that are no longer relevant, as well
as minor formatting updates (e.g., renumbering). In addition, and in
response to the commenters, this final rulemaking also includes an
interim final rule relating to trade options, as discussed in detail
below.
II. Commodity Options Background
A. Commission's Plenary Statutory Authority Over Commodity Options
The CEA provides:
No person shall offer to enter into, enter into or confirm the
execution of, any transaction involving any commodity regulated
under this chapter 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.\9\
---------------------------------------------------------------------------
\9\ See CEA section 4c(b), 7 U.S.C. 6c(b).
Through this provision, Congress has given the Commission jurisdiction
and plenary rulemaking authority over all commodity option
transactions. Notably, while the Dodd-Frank Act included numerous
amendments to the CEA, the plenary options authority provision in CEA
section 4c(b) was not amended or otherwise altered by the Dodd-Frank
Act. Rather, CEA section 4c(b) has been in the Act in substantially the
same form since it was added by the Commodity Futures Trading
Commission Act of 1974.\10\ The Commission has primarily used its
options authority to promulgate the commodity options rules in parts 32
(Regulation of Commodity Option Transactions) \11\ and 33 (Regulation
of Domestic Exchange-Traded Commodity Option Transactions) \12\ of the
existing regulations, as well as to support the adoption of the swaps
rules in part 35.\13\
---------------------------------------------------------------------------
\10\ Public Law 93-463, October 23, 1974.
\11\ 17 CFR part 32.
\12\ 17 CFR part 33.
\13\ 17 CFR part 35. CEA section 4c(b) was cited as one of the
authorizing statutory provisions for original part 35, entitled
``Exemption of Swap Agreements.'' See Exemption of Swap Agreements,
58 FR 5587, at 5589, Jan. 22, 1993 (noting that: ``In enacting this
exemptive rule, the Commission is also acting under its plenary
authority under section 4c(b) of the Act with respect to swap
agreements that may be regarded as commodity options.''). In
addition, when the Commission recently repealed original part 35 and
replaced it with new part 35, entitled ``Agricultural Swaps,'' CEA
section 4c(b) was again cited as one of the authorizing statutory
provisions. See Final Agricultural Swaps Rules, 76 FR at 49295-
49296, n.36, Aug. 10, 2011 (``The Commission is clarifying now that
the new part 35, which will apply only to swaps in agricultural
commodities, is similarly adopted pursuant to the authorities found
in CEA sections 4(c) and 4c(b).'').
---------------------------------------------------------------------------
[[Page 25322]]
B. The NPRM Proposed an Overhaul of Existing Commodity Options
Regulations
As explained in the introduction, the Dodd-Frank Act includes a
definition of swap that encompasses commodity options.\14\ The
Commission proposed the commodity options rules in the NPRM to address
the fact that the existing rules applicable to commodity options \15\
pre-date the Dodd-Frank Act provisions applicable to all other swaps
and, therefore, do not consider or incorporate such provisions.\16\
Therefore, the rules in the NPRM would have amended part 32 to
essentially permit commodity options to trade subject to the same rules
applicable to any other swap. The NPRM contains a detailed description
of the historical development of part 32 and the proposed changes.\17\
The NPRM also includes proposed updates to part 33, which currently
applies to any option traded on a designated contract market (``DCM'')
(whether an option on a future or an option on a physical). In order to
place all options that are swaps under a single part of title 17 of the
Code of Federal Regulations (``CFR''),\18\ the NPRM proposed to remove
from part 33 any reference to an ``option on a physical,'' \19\ leaving
part 33 applicable only to exchange-traded options on futures, and
allowing part 32 to serve as the sole relevant regulation for all other
commodity options (including both exchange-traded options on physical
commodities and all off-exchange commodity options). In addition, the
NPRM proposed repealing the swap exemption in original part 35 and
replacing it with rules for agricultural swaps pursuant to Dodd-Frank's
mandate that agricultural swaps only be permitted pursuant to rules set
by the Commission.\20\
---------------------------------------------------------------------------
\14\ See note 6, above.
\15\ Those existing rules encompassed primarily parts 32 and 33,
but also original part 35, which was a general swap exemption
applicable to, among other things, commodity options that did not
qualify for the trade option exemption.
\16\ In some cases, the pre Dodd-Frank commodity options rules
are inconsistent with certain Dodd-Frank Act provisions, such as the
lack of a requirement in pre Dodd-Frank Sec. 32.4 (17 CFR 32.4)
that counterparties to trade options be eligible contract
participants (``ECPs''). In contrast, section 2(e) of the CEA, 7
U.S.C. 2(e), as amended by the Dodd-Frank Act, requires that
counterparties to all swaps not conducted on or subject to the rules
of a designated contract market be ECPs.
\17\ See NPRM, 76 FR 6095, at 6097-6098; 6101-6103, Feb. 3,
2011.
\18\ The Commission's regulations are set forth in title 17 of
the CFR.
\19\ See NPRM, 76 FR at 6103, Feb. 3, 2011.
\20\ See section 723(c)(3) of the Dodd-Frank Act. As explained
in note 7, above, the proposals in the NPRM related to part 35 and
agricultural swaps have already been adopted by the Commission as
final rules.
---------------------------------------------------------------------------
Under the NPRM, proposed new part 32 would have governed all
commodity options that fall under the Dodd-Frank swap definition \21\
by permitting such commodity options to be transacted subject to the
same laws and rules applicable to any other swap--without
distinguishing between trade options and non-trade options. An
additional element of new part 32, as proposed in the NRPM, was the
elimination of the historical distinction between the treatment of
options on the enumerated agricultural commodities and options on all
other commodities. As proposed in the NPRM, new part 32 would treat
options on both enumerated and non-enumerated agricultural commodities
the same as all other commodity options. Finally, the NPRM included, at
proposed Sec. 32.5, a grandfather clause providing that ``[n]othing
contained in this part shall be construed to affect any lawful
activities prior to the effective date of this part.'' That grandfather
provision is retained unaltered in this final rule.
---------------------------------------------------------------------------
\21\ See note 6, above.
---------------------------------------------------------------------------
III. Comments on the Commodity Options Proposal in the NPRM
A. Request for Comment on the NPRM
In the NPRM, the Commission requested specific input on the
following questions related to the commodity options proposal:
Generally, will the rule changes and amendments proposed
herein provide an appropriate regulatory framework for the transacting
of trade options on all commodities?
Regarding the proposed revisions to part 32, and
specifically the revised Sec. 32.4 trade option exemption, will such
revisions significantly affect hedging opportunities available to
currently active users of the trade options market? In other words, is
there any reason not to revise Sec. 32.4 as proposed? In particular,
are there persons who offer or purchase trade options on non-enumerated
agricultural commodities (e.g., coffee, sugar, cocoa) under current
Sec. 32.4 who would not qualify as ECPs and would therefore be
ineligible to participate in such options under revised Sec. 32.4? If
so, should such participants be excepted from the general requirement
that all swaps participants must be ECPs unless the transaction takes
place on a DCM?
Regarding the proposed withdrawal of Sec. 32.12 (the
dealer option provision) in its entirety, would such action (in
conjunction with the adoption of the new rules proposed herein)
prejudice or otherwise harm any person, group of persons, or class of
transactions? In other words, is there any reason not to withdraw Sec.
32.12 as proposed?
Similarly, and regarding the proposed withdrawal of Sec.
32.13 (the agricultural trade option provision) in its entirety, would
such action (in conjunction with the adoption of the new rules proposed
herein) prejudice or otherwise harm any person, group of persons, or
class of transactions? In other words, is there any reason not to
withdraw Sec. 32.13 as proposed?
Do the proposals as they relate to part 33 appropriately
limit the scope of part 33 to DCM-traded options on futures, leaving
DCM-traded options on physical commodities subject to part 32?
Do the proposals outlined herein omit or fail to
appropriately consider any other areas of concern regarding options in
any commodity?
B. Summary of Comments on the NPRM
1. General Overview
Approximately 39 comment letters were submitted that substantively
addressed the NPRM,\22\ representing a
[[Page 25323]]
broad range of interests, including agricultural producers, merchants,
SDs, commodity funds, futures industry organizations, academics and
think tanks, a U.S. government agency, and private individuals. Twenty-
one different commenters, through various letters, specifically
addressed the commodity options proposal. Commodity options comments on
the NPRM were filed by entities including: The Financial Services
Roundtable (``FSR''); CME Group, Inc. (``CME Group'' or ``CME'');
Futures Industry Association and International Swaps and Derivatives
Association (``FIA & ISDA''); Edison Electric Institute and Electric
Power Supply Association (``EIA-EPSA''); National Grain and Feed
Association (``NGFA''); staff of the Federal Energy Regulatory
Commission (``FERC Staff''); American Public Gas Association
(``APGA''); Air Transport Association of America (``ATA''); Amcot;
Coalition of Physical Energy Companies (``COPE''); Gavilon Group, LLC
(``Gavilon''), which submitted two letters; a joint letter from
National Rural Electric Cooperative Association, American Public Power
Association, and Large Public Power Council (together, the ``Power
Coalition''); Working Group of Commercial Energy Firms (``Energy
Working Group''); Commodity Markets Council (``CMC''); Hess Corporation
(``Hess''); a commodity options and agricultural swaps working group
that includes Barclays Capital, Citigroup, Credit Suisse Securities
(USA) LLC, JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo &
Company (together, ``Commodity Options and Agricultural Swaps Working
Group''); and American Gas Association (``AGA''). Commodity options
comments filed on the Product Definitions NPRM included a joint letter
from Natural Gas Supply Association and National Corn Growers
Association (``NGSA & NCGA''); a second letter from COPE; a letter from
Just Energy Group (``Just Energy''); a letter from American Petroleum
Institute (``API''); a second letter from the Energy Working Group; a
letter from BG Americas & Global LNG (``BGA''); and a second letter
from the Power Coalition.
---------------------------------------------------------------------------
\22\ The public comment file for the NPRM is available at:
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=968.
This comment summary references each of the comments that
substantively addressed the commodity options proposal in the NPRM,
whether submitted in response to the original NPRM, in response to
the Commission's general reopening of the comment period for
multiple Dodd-Frank rule proposals (See Reopening and Extension of
Comment Periods for Rulemakings Implementing the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR 25274, May 4, 2011
(``Dodd-Frank General Reopening'')), or in response to the joint
CFTC and SEC Product Definitions NPRM. Note that none of the
comments submitted in response to Dodd-Frank General Reopening
specifically addressed the commodity options proposal in the NPRM,
and so they are not discussed in detail herein. In addition, certain
comments submitted on this rulemaking may also be addressed by the
final rule implementing the proposals in the Product Definitions
NPRM. Finally, the public comment file for the NPRM also includes
multiple comments that did not directly address the commodity
options proposal (for example, see the comments from Majed El Zein,
B.J. D'Milli, Maryknoll Office for Global Concerns, Maryknoll
Fathers and Brothers, J.C. Hoyt, and Jon Pike), other comments that
only addressed the proposed agricultural swaps rules, and four
records of meetings or communications between Commission staff and
interested industry groups.
---------------------------------------------------------------------------
2. Comments on the Commodity Options Proposal
The commodity options comments generally focused on the following
substantive areas as they related to the commodity options proposal in
the NPRM.
a. Whether the Definition of Swap Includes Commodity Options
Multiple commenters expressed the opinion that treating options as
swaps, as set forth in the NPRM, was premature and should await the
Commission's joint rulemaking with the SEC on the further definition of
a swap.\23\ In particular, FIA-ISDA expressed the opinion that the
definitions rulemaking ``is the proper place to address whether
physical commodity options of any kind, including agricultural
commodity options, should be treated as swaps'' and thus urged the
Commission to defer the commodity options rulemaking until such time as
it issues a final rulemaking further defining a swap. See FIA & ISDA at
4. Similar sentiments were expressed by NextEra, EIA-EPSA, the Power
Coalition, and the Energy Working Group. For example:
---------------------------------------------------------------------------
\23\ See Product Definitions NPRM, 76 FR 29818, May 23, 2011.
The Commission notes that, where applicable, the definitions-based
comments are also being considered in conjunction with its effort,
jointly with the SEC, to further define certain products, including
the term ``swap,'' pursuant to Sec. 712(d) of the Dodd-Frank Act.
As a threshold matter, the Proposed Rule is premature insofar as
it would treat options on physical commodities as swaps before the
Commission has even proposed the definition of what constitutes a
swap pursuant to Section 712(d) of the Dodd-Frank Act . * * * To
avoid inconsistent outcomes and ensure consideration of an
integrated and complete record on transactions to be regulated as
swaps, the Commission should stay this proceeding insofar as it
---------------------------------------------------------------------------
would define commodity options as swaps.
EIA-EPSA at 1-2.
[T]he Working Group respectfully requests that the Commission
stay the instant proceeding until such time that the mandatory final
rule further defining the term `swap' set forth in new Section
1a(47) of the [CEA] is jointly issued by the Commission and the
[SEC]. Until the full scope and application of the definition of
`swap' is known and understood, the Working Group is unable to fully
evaluate the potential implications of the Proposed Rule, or comment
meaningfully on how the proposed regulation of Physical Options
could ultimately affect its members.
Energy Working Group at 2.
Beyond the requests to delay the commodity options final
rulemaking, some commenters disagreed with the interpretation that the
Dodd-Frank swap definition was intended to include all commodity
options. The following comments illustrate this view:
Simply put, a commodity option is not a swap * * * COPE requests
that the Commission find that, unlike swaptions, commodity options
are not swaps.
COPE at 4-5.
The text and structure of the Dodd-Frank Act indicates that
Congress only intended to include options that require financial
settlement and other financial products in the definition of `swap.'
Gavilon 4/4/11 letter at 4.
Physical Options meet the criteria of the so-called `forward
contract exclusion' under section 1a(47)(B)(ii) of the CEA and
therefore must be excluded from the definition of a `swap' under
section 1a(47).
NGSA & NCGA letter at 3.\24\ See also, letters from AGA and API.
---------------------------------------------------------------------------
\24\ As discussed below, the NGSA & NCGA letter supported, in
the alternative, multiple different approaches to their end goal of
exempting or excluding physically settled commodity options from
swap regulation.
---------------------------------------------------------------------------
The Energy Working Group acknowledged that the swap definition
likely included options, but argued that the Commission should take
action to avoid that result:
Although Congress included Physical Options in the definition of
`swap,' it also vested the Commission with the statutory authority
[referencing CEA section 4c(b)] to regulate options, including
Physical Options, in a manner different than swaps. The Working
Group's members consider Physical Options as distinct from other
`swaps,' and more akin to physically-settled forward contracts, and
believe that there are substantive policy reasons to treat these
types of transactions in a similar manner. Regulating Physical
Options as swaps under Title VII of the Act would have a substantial
negative effect on not only the market for such options, but also
more broadly on physical energy markets and participants in such
markets that rely on physical energy commodities during their normal
course of business.
Energy Working Group at 4.
The Energy Working Group letter went on to provide several examples
of ``transactions that energy market participants do not historically
consider options, but nonetheless contain an element of optionality * *
* and should not be regulated as swaps.'' Their letter described
contracts called daily natural gas calls, wholesale full requirements
contracts for power, tolling agreements in organized wholesale
electricity markets, physical daily heat rate call options, and
capacity contracts. See Energy Working Group at Exhibit A. APGA and ATA
also requested that the Commission clarify that certain variable amount
delivery contracts that are common in the energy sector be excluded
from the definition of a swap. CMC requested that the Commission
clarify that certain other types of transactions fall within the
definition of an excluded forward contract rather than the definition
of a swap. CMC specifically commented that cash
[[Page 25324]]
forward contracts with embedded options and certain cash transaction
book-outs should not be treated as ``swaps.'' CMC at 1. Amcot requested
clarification that ``equity trades'' or ``options to redeem'' cotton
from the U.S. Department of Agriculture's Commodity Credit Corporation
marketing loan program would not be considered swaps.\25\
---------------------------------------------------------------------------
\25\ After CFTC staff reviewed the ``options to redeem'' with
both USDA staff members responsible for managing the cotton
marketing loan program and industry representatives from Amcot (an
association of US cotton marketing cooperatives), the Commission has
concluded that the ``options to redeem'' under USDA's cotton
marketing loan program constitute the producer's contractual right
to repay the marketing loan and ``redeem'' the collateral (the
cotton), to sell in the open market. As such, the ``option'' to
redeem cotton under USDA Commodity Credit Corporation's marketing
loan program is a standard loan repayment term and does not
constitute a commodity option within the meaning of the CEA and CFTC
regulations.
---------------------------------------------------------------------------
Regarding those comments describing specific transactions, and in
particular CMC's comments, the Commission notes that the proposed
further definition of swap included a discussion of the applicability
of the swap definition to both forwards with embedded options and book-
out transactions.\26\ The Commission further notes that, in response to
both the NPRM and the Product Definitions NPRM, several comments were
submitted regarding ``volumetric options'' in particular (i.e.,
optionality in a contract settling by physical delivery that is used to
meet varying demand for a commodity). The final further definition of
the term swap to be issued by the Commission and the SEC will address
the applicability of the swap definition (and thus, the applicability
of this final rule and interim final rule) to such volumetric
options.\27\
---------------------------------------------------------------------------
\26\ See Product Definition NPRM, 76 FR at 29827-29830, May 23,
2011.
\27\ See note 6, above.
---------------------------------------------------------------------------
b. Trade Option Exemption
While the commodity options rules proposed in the NPRM would have
removed the trade option exemption that is currently at 17 CFR
32.4,\28\ the vast majority of commenters who expressed an opinion on
the topic supported retaining a trade option exemption, in one form or
another, for options that require physical delivery if exercised, and
were opposed to treating such options as swaps subject to all
applicable Dodd-Frank swaps regulatory requirements. The current trade
option exemption is an exemption from the existing prohibition against
off-exchange commodity option transactions in 17 CFR 32.11. In
contrast, the commenters requested a trade option exemption for the
purpose of being exempt from (1) the swap definition, and/or (2) any
final rules that would treat commodity options the same as any other
swap. The following statement from Hess Corporation illustrates this
view that certain options should not be regulated as swaps:
---------------------------------------------------------------------------
\28\ Current 17 CFR 32.4(a) provides: ``* * * the [prohibition
on off-exchange commodity options contained in 17 CFR 32.11] shall
not apply to a commodity option offered by a person which has a
reasonable basis to believe that the option is offered to a
producer, processor, or commercial user of, or a merchant handling,
the commodity which is the subject of the commodity option
transaction, or the products or by-products thereof, and that such
producer, processor, commercial user or merchant is offered or
enters into the commodity option transaction solely for purposes
related to its business as such.''
Treating all options, financial and physical, as swaps will
result in significant unintended consequences for Hess and other
commercial entities that rely on physical options to manage their
business risk. Hess does not believe Congress intended such a
result. On the contrary, Hess believes that the Dodd-Frank Act
defines `swap' in a manner that plainly distinguishes between
financial and physical transactions. Accordingly, Hess urges the
Commission to regulate options in a similar manner by excluding
options that are intended to be physically settled once exercised
---------------------------------------------------------------------------
from the definition of `swap.'
Hess Corporation at 1. Similar sentiments were expressed by the Power
Coalition, the Energy Working Group, Gavilon, APGA, ATA, NGSA & NCGA,
AGA, API, and COPE. For example:
If the Commission proposes rules to discard the `trade option
exemption,' it should concurrently replace it with a `trade option
exemption for nonfinancial commodities' to the defined term `swap.'
Power Coalition at 15.
Gavilon urges the Commission to issue an order pursuant to CEA
Section 4c(b) that allows commercial entities to enter into Physical
Options subject only to conditions that are comparable to the
requirements in current Part 32.4.
Gavilon April 4, 2011 letter at 6-7.
[R]egulation of Physical Options as `swaps' would cause serious
harm to the natural gas and other physical commodity markets,
without providing significant benefits * * *. For these reasons, the
Commission must recognize, in its final rule, either in the
definition of a `swap' or by preserving the trade option exemption,
that Physical Options are excluded, or are eligible for exemption,
from regulation as swaps.
NGSA & NCGA at 4-5.
[I]f the Commission determines to move forward with the [Options
NPRM], it must make clear that no physically settled agreements are
covered [or] included in any rule pertaining to swaps.
COPE at 5. CME expressed the opinion that ``[We believe that] Congress
did not necessarily intend for the Commission to treat all options on
commodities as `swaps' * * * but we have no objection to this
outcome.'' CME at 3.
c. Eligible Contract Participants and Trade Options
The energy industry commenters expressed concerns regarding the
fact that treating commodity options as swaps would require all trade
options counterparties to be ECPs--because trade options are typically
bilateral, off-exchange transactions, and CEA section 2(e) permits only
ECPs to transact swaps other than on or subject to the rules of a DCM.
The commenters noted that there are many non-ECP market participants
who currently rely on the trade option exemption for option
transactions in a wide range of commodities. For example:
If the Commission eliminates the ability of the NFP Electric End
Users to engage in energy and energy-related commodity options, or
conditions the use of such trade options on the NFP Electric End
Users qualifying as eligible contract participants, it will have a
significant and detrimental effect on the NFP Electric End Users'
ability to hedge their commercial risk in a cost effective way.
Power Coalition at 14.
The Commodity Options NOPR states that, `based on its review [of
the history of the Commission's development of commodity options
regulation], the Commission has determined that there would be
little practical effect and no detrimental consequences in adopting
the proposed revisions to the existing commodity options regime in
part 32.' [citing NPRM at 76 FR 6101]. The Coalition disagrees
strongly with the Commission's determination * * *. We consider the
Commission's Proposed Rule to be highly detrimental to the NFP
Electric End Users' ability to provide affordable electric energy to
American businesses and consumers.
Power Coalition at 16.
Since, in general, market participants must meet certain net
worth thresholds to qualify as an `eligible contract participant'
[footnote omitted] and many Physical Options used by small end users
are customized or illiquid and thus not traded on exchanges, the
ability of small end users to transact in Physical Options would be
limited to on-exchange contracts that do not exist or do not match
their needs.
NGSA & NCGA at 4.
Similarly, the FSR pointed out, in a comment primarily addressing
the proposed definition of ECP,\29\ that there
[[Page 25325]]
may be issues with the fact that the proposal in the NPRM to modify the
trade option exemption would eliminate the availability of the trade
option exemption for non-ECPs. See FSR at 26, n.18.
---------------------------------------------------------------------------
\29\ See: Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' 75
FR 80174, Dec. 21, 2010 (joint rulemaking with SEC; the comment
period originally closed on February 22, 2011, and was extended to
June 3, 2011).
---------------------------------------------------------------------------
d. FERC-Regulated Transactions
FERC Staff noted that ``depending on how broadly the term `swap' is
construed, CFTC regulation of swaps could lead to inconsistent
regulation of participants and transactions subject to FERC
jurisdiction, and in particular the organized electricity markets.''
FERC Staff at 1. The energy and electricity commenters also expressed
concerns about the jurisdictional overlap. One commenter specifically
noted that, ``[Physical Options] in the natural gas market are already
subject to certain regulatory oversight by [FERC] and state public
utility commissions with respect to price, prudence, and
manipulation.'' NGSA & NCGA at 5.
e. Deleting the Dealer Option Provisions
FIA-ISDA supported the proposed withdrawal of regulation 32.12
(pertaining to the grandfathering of certain dealer options). In
particular, FIA-ISDA concurred with the Commission's assertion that
``the dealer option business has not existed since the early 1990s''
and thus there is no longer a need for this grandfathering provision.
See FIA-ISDA at 6.
f. Deleting the Agricultural Trade Option Provisions
There was only one comment related to eliminating the Agricultural
Trade Option (ATO) Merchant provisions in part 32. Specifically, NGFA
supported eliminating the provisions, observing:
[NGFA] long has believed that an effective ATO regulatory
structure could benefit agricultural producers and the
agribusinesses with which they work to develop marketing strategies
and market their crops. However, the rules in place have been
unwieldy and, consequently, the ATO merchant registration regime has
been largely unused * * *. The NGFA believes the redefinition of
ATOs as swaps, subject to conditions under Dodd-Frank (notably the
Eligible Contract Participant rules), will result in enhanced
development and use of products that formerly would have been
categorized as agricultural trade options and a broader range of
risk management tools.
NGFA at 2.
g. Options Fraud Provisions
The proposed rules for commodity options in the NPRM would have
retained the existing enforcement provisions in part 32, i.e., Sec.
32.8 (``Unlawful representations; execution of orders'') and Sec. 32.9
(``Fraud in connection with commodity option transactions''). EEI-EPSA
requested a modification of Sec. 32.9, regarding fraud in connection
with commodity option transactions, to include a ``requisite intent''
requirement. EEI-EPSA at 11.
As noted above, in the final rule issued herein, the Commission is
retaining Sec. 32.9 (``Fraud in connection with commodity option
transactions''), which has been renumbered as Sec. 32.4, but not
otherwise changed. The Commission is not including the requisite intent
standard requested by EEI-EPSA, because it would narrow the scienter
standard for fraud established by Commission precedent, which is
``intentionally or with reckless disregard.'' \30\ Moreover, in first
promulgating its option fraud regulation, the Commission did ``not use
the concept of willful behavior'' in the regulation text out of concern
regarding the potential for courts to take a restrictive view of the
Commission's antifraud authority.\31\ The final rule does not retain
Sec. 32.8 (``Unlawful representations; execution of orders''). That
provision was originally intended to apply to the retail over-the-
counter (``OTC'') options market. Such retail OTC options transactions
have been prohibited since the adoption of the general options
prohibition at Sec. 32.11 in 1978.\32\ Thus Sec. 32.8 is no longer
necessary, particularly since the violations listed in Sec. 32.8 are
either irrelevant (in that they apply to intermediated transactions,
whereas trade options are generally principal-to-principal
transactions) or are subsumed by the general antifraud rule, or both.
---------------------------------------------------------------------------
\30\ See In re Osler, CFTC Docket No. 00-5, 2001 WL 138975 (CFTC
Feb. 15, 2001) (finding options fraud in violation of regulations
32.9 and 33.10; ``A person acts with scienter if he acts
intentionally, or with reckless disregard for his duties under the
Act.'' (citing Hammond v. Smith Barney Harris Upham & Co., [1987-
1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,617 at 36,659
(CFTC March 1, 1990)).
\31\ See Part 30--Fraud in Connection with Commodity
Transactions, 40 FR 26504, at 26505 and note 2, June 24, 1975
(adopting final rules in connection with commodity options and
certain other transactions; ``by adopting rules patterned by
antifraud provisions that Congress has approved as part of the
statutory scheme of the Commodity Exchange Act [in section 4b], the
Commission can fairly expect that the courts will adopt a consistent
and uniform approach to the prevention of fraudulent and deceptive
acts and practices under the Commodity Exchange Act'').
\32\ See Suspension of the Offer and Sale of Commodity Options,
43 FR 16153, Apr. 17, 1978.
---------------------------------------------------------------------------
IV. Explanation of the Final Rule and Interim Final Rule for Commodity
Options
A. Introduction
After considering the complete record in this matter, including all
comments to the NPRM, the Commission is now adopting and issuing this
final rule and interim final rule for commodity options. Broadly
speaking, the final rule would implement the commodity option rules as
proposed in the NPRM, whereby commodity options are permitted subject
to the same rules as all other swaps, with additional minor revisions
to part 32. In addition, the interim final rule includes a new trade
option exemption from certain swaps regulations.
B. Sections Unchanged From the NPRM
The final rule as it relates to revisions to part 3 and to part 33
of the Commission's regulations is the same as in the NPRM.\33\
---------------------------------------------------------------------------
\33\ For the purposes of part 33, as amended herein, the
Commission clarifies that an option on a futures contract is an
option that, upon exercise, results in a futures position.
---------------------------------------------------------------------------
C. New Part 32
1. Final Rule
The Commission is publishing this final rule in order to provide
increased regulatory certainty to market participants transacting
commodity options, along with an interim final rule to permit
additional public comment on a new trade option exemption. The final
rule issued herein generally adopts the commodity options proposal as
set forth in the NPRM. That is, under this final rule, commodity
options will be permitted to transact subject to the same rules
applicable to any other swap. This general authorization is necessary
because the Commission's plenary rulemaking authority over commodity
options provides that: ``[n]o person shall offer to enter into, enter
into or confirm the execution of, any transaction involving any
commodity regulated under this chapter which is [a commodity option
transaction], 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.'' \34\ By adopting this final rule, the Commission provides
the required general authorization for commodity options that are
subject to the swap
[[Page 25326]]
definition,\35\ and removes any uncertainty as to whether CEA section
4c(b) would otherwise prohibit such commodity options.
---------------------------------------------------------------------------
\34\ See CEA section 4c(b).
\35\ See note 6, above.
---------------------------------------------------------------------------
The remainder of the final rule (i.e., everything else in new part
32) largely tracks the commodity options language proposed in the NPRM,
with a few minor revisions, including formatting and renumbering
changes. For example, the final rule renumbers the sections of new part
32 to delete (rather than reserve, as had been proposed in the NPRM)
the provisions in existing part 32 that are being deleted. A second
difference is that the proposal in the NRPM would have retained
existing Sec. 32.8, entitled ``Unlawful representations; execution of
orders,'' while this final rule deletes that provision, as discussed
above. Moreover, this commodity options final rule retains the strong
options antifraud language that was proposed in the NPRM at Sec. 32.9
(now renumbered as Sec. 32.4).\36\ In addition, the general commodity
options authorization, proposed as Sec. 32.4 and renumbered herein as
Sec. 32.2, has been reformatted and updated to include a reference to
the interim final rule, i.e., the new Sec. 32.3 trade option
exemption, which is described in detail, below.
---------------------------------------------------------------------------
\36\ This provision is the same antifraud language used in part
32 prior to the adoption of this final rule and interim final rule.
---------------------------------------------------------------------------
2. Interim Final Rule; Trade Option Exemption
a. Exemption From General Swaps Rules
The interim final rule incorporates a new Sec. 32.3 into part 32,
providing an exemption from certain swaps regulations for trade options
on exempt and agricultural commodities as between certain commercial
and sophisticated counterparties. This trade option exemption will
operate as an alternative to the general commodity options
authorization in Sec. 32.2. Pursuant to the trade option exemption
issued as an interim final rule herein, if the offeror,\37\ the
offeree,\38\ and the characteristics of the option transaction meet the
requirements of the trade option exemption, such option transaction
will be exempt from the general Dodd-Frank swaps regime,\39\ subject to
specified ongoing conditions and compliance requirements discussed
below, as applicable.
---------------------------------------------------------------------------
\37\ The offeror, sometimes also called the grantor, is the
seller of a commodity option.
\38\ The offeree, sometimes also called the grantee, is the
buyer of a commodity option.
\39\ For example: Trade options would not contribute to, or be a
factor in, the determination of whether a market participant is an
SD or MSP; trade options would be exempt from the rules on mandatory
clearing; and trade options would be exempt from the rules related
to real-time reporting of swaps transactions. The provisions
identified in this footnote are not intended to constitute an
exclusive or exhaustive list of the swaps requirements from which
trade options are exempt.
---------------------------------------------------------------------------
b. Offeror
Under the terms of the interim final rule, the offeror must fall
into one of two categories. The offeror may be an ECP, which assures
that option grantors will have some minimal level of financial
resources and sophistication in order to minimize the risk that a
seller would not be able to perform its obligations under a commodity
option.\40\ Alternatively, the offeror may be a producer, processor, or
commercial user of, or a merchant handling the commodity which is the
subject of the commodity option transaction, or the products or by-
products thereof, and be offering or entering into the transaction
solely for purposes related to its business as such. Because the trade
option exemption generally is intended to permit parties to hedge or
otherwise enter into transactions for commercial purposes, and because
certain commercial parties prefer to transact primarily with other
commercial parties, the trade option exemption set forth in the interim
final rule specifically authorizes commercials who may not be ECPs to
act as trade option offerors. In either instance, the trade option
offeror may only offer or enter into the contract if it reasonably
believes, consistent with the standard in the existing trade option
exemption, that the offeree meets the offeree requirements specified
below.
---------------------------------------------------------------------------
\40\ The existing trade option exemption, which the interim
final rule trade option exemption would replace, includes no
standards or requirements for option offerors.
---------------------------------------------------------------------------
c. Offeree
The offeree must meet the same basic requirements as under the
existing trade option exemption. That is, the option buyer must be a
producer, processor, or commercial user of, or a merchant handling the
commodity which is the subject of the commodity option transaction, or
the products or by-products thereof, and be entering into the
transaction solely for purposes related to its business as such. Note
that there is no ECP requirement or other financial eligibility
standard for the offeree. The purpose of requiring the trade option
buyer to be a commercial, and of not imposing an ECP or other financial
eligibility standard, is to ensure that hedging opportunities for
commercial entities, for physically delivered transactions used for
purposes related to their business as such, remain available regardless
of the size or sophistication of the commercial entity.
d. Physical Commodity Option
The third element of the trade option exemption is that both
parties must intend that the commodity option be physically settled, so
that, if exercised, the option would result in the sale of an exempt or
agricultural (i.e., non-financial) commodity for immediate (spot) \41\
or deferred (forward) shipment or delivery. To assist parties in
determining whether the sale of the exempt or agricultural commodity is
intended to be physically settled, the Commission refers parties to the
forward contract exclusion guidance as provided in the Product
Definition NPRM,\42\ or such other guidance as ultimately may be
adopted in the final product definition rulemaking. That is, to the
extent the obligations that remain (or are created) upon the exercise
of a commodity option are spot transactions or fall within the forward
contract exclusion from the swap definition, such commodity option is
eligible for the trade option exemption.
---------------------------------------------------------------------------
\41\ If not specified by law (see, e.g., CEA section
2(c)(2)(C)(i)(II)(bb)(AA), 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA)) or
cash market practice, to be a spot transaction, rather than a
forward transaction, delivery must occur ``within a reasonable time
[after the contract is executed] in accordance with prevailing cash
market practice.'' Regulation of Noncompetitive Transactions
Executed on or Subject to the Rules of a Contract Market, 63 FR
3708, 3711, Jan. 26, 1998 (concept release). Delivery under a spot
contract usually occurs within a few days of the trade date. See
CFTC Interpretative Letter 98-73, available at http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/98-73.pdf
(October 1998), stating that ``[i]n a spot transaction, immediate
delivery of the product and immediate payment for the products are
expected on or within a few days of the trade date'' and citing CFTC
Interpretative Letter No. 97-01, 1996-98 Transfer Binder Comm. Fut.
L. Rep. (CCH) ] 26,937 at p. 44,520 (December 12, 1996), in turn
citing Timothy J. Snider, Regulation of the Commodities Futures and
Options Markets, Vol. 1, Sec. 9.01 (2ed. 1995). However, under cash
market practices in some markets, delivery can occur more than a few
days after the trade date. See CFTC, Division of Trade and Markets:
Report on Exchange of Futures for Physicals 51, 65, 124-147 (1987)
(noting that under then-prevailing cash market practices,
transactions in crude oil and sugar called for delivery in 30 and 75
days, respectively, while foreign currency spot transactions settled
in 2 days).
\42\ See Product Definition NPRM, 76 FR at 29827-29830, May 23,
2011.
---------------------------------------------------------------------------
e. Trade Option Exemption Conditions
While the trade option exemption issued herein would operate as a
general exemption from the rules otherwise applicable to other swaps
(i.e., the Dodd-Frank swaps regime), the trade option exemption is
subject to certain
[[Page 25327]]
conditions. The conditions are primarily intended to preserve a level
of market visibility for the Commission while reducing the regulatory
compliance burden for market participants.
i. Recordkeeping Pursuant to Part 45
These conditions include a recordkeeping requirement for any trade
options activity, i.e., the recordkeeping requirements of 17 CFR
45.2.\43\ Such records must be maintained by all trade option
participants pursuant to Sec. 45.2 and made available to the
Commission as specified therein.\44\ Section 45.2 applies different
recordkeeping requirements, depending on the nature of the
counterparty. For example, if a trade option counterparty is an SD or
MSP, it would be subject to the provisions of Sec. 45.2(a). If a
counterparty is neither an SD nor an MSP, it would be subject to the
less stringent recordkeeping requirements of Sec. 45.2(b). This
recordkeeping condition will ensure that trade options market
participants are able to provide pertinent information regarding their
trade options activity to the Commission, if requested.
---------------------------------------------------------------------------
\43\ The Commission recently adopted final swap data
recordkeeping rules. See Swap Data Recordkeeping and Reporting
Requirements 77 FR 2136, at 2198, Jan. 13, 2012.
\44\ 17 CFR 45.2(h) provides that: [a]ll records required to be
kept pursuant to this section [17 CFR 45.2] by any registrant or its
affiliates or by any non-SD/MSP counterparty subject to the
jurisdiction of the Commission shall be open to inspection upon
request by any representative of the Commission, the United States
Department of Justice, or the [SEC], or by any representative of a
prudential regulator as authorized by the Commission. Copies of all
such records shall be provided, at the expense of the entity or
person required to keep the record, to any representative of the
Commission upon request. Copies of records required to be kept by
any registrant shall be provided either by electronic means, in hard
copy, or both, as requested by the Commission, with the sole
exception that copies of records originally created and exclusively
maintained in paper form may be provided in hard copy only. Copies
of records required to be kept by any non-SD/MSP counterparty
subject to the jurisdiction of the Commission that is not a
Commission registrant shall be provided in the form, whether
electronic or paper, in which the records are kept.
---------------------------------------------------------------------------
ii. Reporting Pursuant to Part 45
In addition to part 45 recordkeeping (which applies in some form to
all trade options and trade option participants), the interim final
rule requires certain trade options to be reported pursuant to part
45's reporting provisions. Under the interim final rule, the
determination as to whether a trade option is required to be reported
pursuant to part 45 is based on the parties to the trade option and
whether or not they have previously reported swaps pursuant to part 45.
Specifically, if any trade option involves at least one counterparty
(whether as buyer or seller) that has (1) Become obligated to comply
with the reporting requirements of part 45, (2) as a reporting party,
(3) during the twelve month period preceding the date on which the
trade option is entered into, (4) in connection with any non-trade
option swap trading activity, then such trade option must also be
reported pursuant to the reporting requirements of part 45. If only one
counterparty to a trade option has previously complied with the part 45
reporting provisions, as described above, then that counterparty shall
be the part 45 reporting entity for the trade option. If both
counterparties have previously complied with the part 45 reporting
provisions, as described above, then the part 45 rules for determining
the reporting party will apply.\45\
---------------------------------------------------------------------------
\45\ See 17 CFR 45.8.
---------------------------------------------------------------------------
By applying the part 45 reporting requirements to trade options in
this manner, the Commission will obtain greater transparency and
improved oversight of the swaps markets, both of which are primary
statutory objectives of Title VII of the Dodd-Frank Act. The Commission
believes, however, that greater transparency regarding the trade
options market must be balanced against the burdens of frequent and
near-instantaneous reporting required under part 45 of the Commission's
regulations on counterparties who are not otherwise obligated to report
because they do not have other reportable swap activity. Accordingly,
if neither counterparty to a trade option already is complying with the
reporting requirements of part 45 as a reporting party in connection
with its non-trade option swap trading activities as described
above,\46\ then such trade option is not required to be reported
pursuant to the reporting requirements of part 45.\47\
---------------------------------------------------------------------------
\46\ That is, neither counterparty to the trade option has
previously reported, as the reporting party, non-trade option swap
trading activity during the twelve months preceding the date on
which the trade option is entered into.
\47\ By taking this approach, the Commission ensures that no
market participant is compelled to comply with part 45's reporting
requirements based solely on its trade options activity.
---------------------------------------------------------------------------
iii. Annual Notice Filing Alternative to Part 45 Reporting; Form TO
To the extent that neither counterparty to a trade option has
previously submitted reports to an SDR as a result of its swap trading
activities as described above, the Commission recognizes that requiring
these entities to report trade options to an SDR under part 45 of the
Commission's regulations solely with respect to their trade options
activity would be costly and time consuming. As an alternative, the
interim final rule requires any counterparty to an otherwise unreported
trade option to submit an annual filing to the Commission for the
purpose of providing notice that it has entered into one or more
unreported trade options in the prior calendar year. Unlike with trade
options subject to the part 45 reporting requirement, wherein only one
counterparty to the trade option reports the transaction to an SDR, the
notice filing requirement applies to both counterparties to an
unreported trade option. Because the purpose of the notice filing
requirement is to identify to the Commission those market participants
engaging in unreported trade options, the notice filing requirement
applies whether or not such counterparty has also been a non-reporting
counterparty to a reported trade option in the twelve months preceding
the date on which the unreported trade option was entered into. Market
participants will satisfy the annual notice filing requirement by
completing and submitting a new Commission form, Form TO, by March 1
following the end of any calendar year during which the market
participant entered into one or more unreported trade options.
Form TO requires an unreported trade option counterparty to: (1)
Provide name and contact information, (2) identify the categories of
commodities (agricultural metals, energy, or other) underlying one or
more unreported trade options which it entered into during the prior
calendar year, and (3) for each commodity category, identify the
approximate aggregate value of the underlying physical commodities that
it either delivered or received in connection with the exercise of
unreported trade options during the prior calendar year. For the
purposes of item (3), a reporting counterparty should not include the
value of commodities that were the subject of trade options that
remained open at the end of the calendar year or any trade options that
expired unexercised during the prior calendar year.
Pursuant to the interim final rule, Form TO is an annual filing
requirement. The form must be submitted to the Commission no later than
March 1 for the prior calendar year. For example, if a market
participant enters into one or more unreported trade options between
January 1, 2013 and December 31, 2013 (as will be discussed in the
effective date and compliance date discussion, below, the first
calendar year for which a Form TO will be due to the Commission is
2013), the
[[Page 25328]]
market participant must submit a completed Form TO to the Commission on
or before March 1, 2014. Form TO is set out in appendix A to part 32 of
the Commission's regulations and will be available electronically on
the Commission's Web site at least ninety days before the first
compliance date for filing of that form, March 1, 2014. The Form TO
filing requirement will provide the Commission a minimally intrusive
level of visibility into the unreported trade options market, will
guide the Commission's efforts to collect additional information
through its authority to obtain copies of books or records required to
be kept pursuant to the Act \48\ should market circumstances dictate,
and will enable the Commission to determine whether these
counterparties should be subject to more frequent and comprehensive
reporting obligations in the future.
---------------------------------------------------------------------------
\48\ See 17 CFR 1.31(a)(2) and 17 CFR 45.2(h).
---------------------------------------------------------------------------
iv. Specific Request for Comment on Trade Option Reporting and/or
Notice Filing Requirements
The Commission is specifically requesting comment on including
these part 45 recordkeeping and reporting compliance conditions, and
the Form TO filing requirement for counterparties to unreported trade
options, in connection with the interim final rule's trade option
exemption. For example, what are the trade-offs between (1) reducing or
removing the reporting requirement and/or notice filing requirement
(and attendant costs) for smaller end-user and commercial entities and
(2) the Commission's goals of maintaining market visibility and
eliminating incentives or opportunities to avoid regulation? In their
comments, market participants should identify alternatives, if any, to
the part 45 recordkeeping and reporting requirements and/or the Form TO
filing requirement as applicable to trade options participants.
Commenters should explain how such alternatives may be able to provide
the Commission with the equivalent market information and visibility it
would receive pursuant to the part 45 requirements and/or the Form TO
filing requirement, as applicable under the interim final rule, while
lowering the compliance burden on market participants.
v. Swaps Large Trader Reporting; Position Limits
The interim final rule's trade option exemption also includes
certain conditions referencing various other swaps rules, which rules
shall remain applicable to trade options under this interim final rule.
Specifically, the following conditions, as set forth in interim final
rule Sec. 32.3(c), would apply to trade options (and trade option
participants) to the same extent that such conditions would apply to
any other swap (and swap counterparty): (1) Large trader reporting
under part 20 (i.e., reporting entities under part 20--SDs and clearing
members--must consider their counterparty's trade option positions just
as they would consider any other swap position for the purpose of
determining whether a particular counterparty has a consolidated
account with a reportable position, as set forth therein); \49\ and (2)
position limits under part 151 (to the extent a trade option position
would otherwise be subject to the position limit rules).\50\
---------------------------------------------------------------------------
\49\ 17 CFR part 20. Note that swap large trader reporting
obligations apply only to SDs and clearing members. Trade option
sellers and buyers (unless they fall within one of the part 20
reporting party categories) would not be responsible for filing
large trader reports.
\50\ 17 CFR part 151. Note that position limits apply only to
speculative positions in those referenced contracts specified in
part 151. Trade options, which are commonly used as hedging
instruments or in connection with some commercial function, would
normally qualify as hedges, exempt from the speculative position
limit rules.
---------------------------------------------------------------------------
vi. SD/MSP Conditions
In addition, Sec. 32.3(c) provides that certain provisions of
subpart F and subpart J of part 23, relating to recordkeeping,
reporting, and risk management duties of SDs and MSPs would apply to
trade options.\51\ SDs and MSPs participating in trade options will
also remain subject to CEA section 4s(e), which addresses capital and
margin requirements for SDs and MSPs. Each of these SD and MSP
conditions simply confirms that an SD and/or MSP may not avoid certain
requirements or obligations by structuring its swap transactions as
trade options. SDs and MSPs may participate in trade options when they
meet the underlying trade option offeror or offeree eligibility
requirements, as applicable. But they will remain subject to the SD/MSP
conditions identified in the interim final rule. As with the part 20
and part 151 conditions applicable to all trade options and trade
options participants, the SD/MSP conditions only apply in the context
of trade options to the extent they would otherwise apply to the
transaction as any other kind of swap (i.e., as a non-trade option).
---------------------------------------------------------------------------
\51\ Swap Dealer and Major Swap Participant Recordkeeping and
Reporting, Duties, and Conflicts of Interest Policies and
Procedures; Futures Commission Merchant and Introducing Broker
Conflicts of Interest Policies and Procedures; Swap Dealer, Major
Swap Participant, and Futures Commission Merchant Chief Compliance
Officer, 77 FR 20128, Apr. 3, 2012. Note that these part 23
provisions, like the part 20 provisions, would only apply to certain
large sophisticated entities--in this case, SDs and MSPs.
---------------------------------------------------------------------------
vii. Enforcement Provisions
Finally, at Sec. 32.3(d), the interim final rule also retains for
trade options the antifraud and anti-manipulation rules under part
180,\52\ Sec. 23.410,\53\ the specific options antifraud provisions of
pre-Dodd-Frank Sec. 32.9 (renumbered herein as Sec. 32.4), and any
other general antifraud, anti-manipulation, and enforcement provisions
of the CEA, including but not limited to, CEA sections 2, 4b, 4c, 4o,
4s(h)(1)(A), 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.
---------------------------------------------------------------------------
\52\ 17 CFR part 180.
\53\ 17 CFR 23.410.
---------------------------------------------------------------------------
viii. General Exemptive Authority Retained
The trade option exemption also contains general exemptive language
that would permit the Commission, upon written request or upon its own
motion, to exempt any other person, either unconditionally or on a
temporary or other conditional basis, from any provisions of part 32
(other than the antifraud, anti-manipulation, and enforcement rules),
or from the provisions of the Act, including any Commission rule,
regulation, or order thereunder, otherwise applicable to any other
swap, if the Commission finds, in its discretion, that it would not be
contrary to the public interest to grant such exemption. This
supplemental language tracks the general exemptive provision in the
existing trade option exemption, and it will provide the Commission
with the flexibility to receive and consider any concerns from market
participants regarding the scope or implementation of the interim final
rule trade option exemption.
D. Effective Date; Compliance Date
The commodity options final rule and interim final rule issued
herein shall become effective 60 days after the publication of this
document in the Federal Register.
The compliance date for the final rule and the interim final rule
shall be 60 days after the term ``swap'' is further defined pursuant to
section 721 of the Dodd-Frank Act (i.e., 60 days after the further
definition of ``swap'' is adopted by the Commission and the SEC and
published in the Federal Register). However, for the purpose of
complying with (1) final rule Sec. 32.2(a), which permits entering
into commodity options transactions in compliance with
[[Page 25329]]
and subject to the provisions of the Act, including any Commission
rule, regulation, or order thereunder, otherwise applicable to any
other swap, and (2) the conditions and provisions of the interim final
rule trade option exemption under Sec. 32.3, the compliance date for
this final rule and interim final rule shall be the compliance date
associated with any such swaps rules. That is, notwithstanding the
effective or compliance dates identified herein, commodity options
market participants need not comply with any applicable condition
referencing a swap rule, regulation, or order, until such time as the
rule, regulation, or order is applicable to any other swap. In
addition, the first relevant compliance date for the Form TO notice
filing requirement will be for the calendar year beginning January 1,
2013. That is, counterparties to unreported trade options are required
to submit a Form TO in connection with their unreported trade options
entered into between January 1 and December 31, 2013 on or before March
1, 2014. There is no Form TO filing requirement for unreported trade
options entered into between the effective date of this rule and
December 31, 2012.
V. Interim Final Rule Matters
This document implements regulations addressing the inclusion of
commodity options in the Dodd-Frank Act definition of ``swap.'' Section
721 of the Dodd-Frank Act defines the term ``swap'' to include an
option of any kind that is for the purchase or sale, or based on the
value, of one or more commodities. The existing trade option exemption
exempts certain trade options from the CEA almost entirely and was
enacted pursuant to section 4c(b) of the CEA, which provides the CFTC
with plenary authority to issue regulations related to commodity
options. Such authority was not amended by the Dodd-Frank Act, and
therefore, Congress continues to vest the Commission with plenary
authority over commodity options. Prior to the Dodd-Frank Act, CFTC
regulations provided for a trade option exemption, permitting the
trading of qualifying transactions subject only to antifraud, anti-
manipulation, and enforcement rules.\54\ As discussed above, the Dodd-
Frank Act defined commodity options as swaps. Accordingly, the CFTC
proposed to amend the commodity options rules generally, and to
specifically withdraw the trade option exemption, thereby providing
that commodity options could transact subject to the same laws, rules,
regulations, and orders otherwise applicable to all other swaps,
consistent with the Dodd-Frank Act. As explained in the comment summary
above, the proposal requested comment regarding trade options and
multiple commenters requested that the CFTC retain some form of a trade
option exemption, particularly for physically delivered options.
Therefore, in response to comments, and pursuant to its plenary
authority over commodity options, the CFTC is implementing a revised
trade option exemption, with certain conditions described above,
through this interim final rule.
---------------------------------------------------------------------------
\54\ See prior 17 CFR 32.4.
---------------------------------------------------------------------------
The CFTC nevertheless invites comments on this interim final rule
and, when assessing whether to amend the interim final trade option
exemption, will consider all timely comments submitted during the
public comment period as described in the following section.
VI. Request for Comment on Interim Final Rule
In connection with the interim final rule's trade option exemption
in Sec. 32.3 adopted herein, the Commission requests comment on the
following questions:
1. Generally, does the interim final rule issued herein provide an
appropriate regulatory framework for trade options?
2. Regarding the trade option exemption, will such provision
preserve appropriate hedging opportunities for current users of the
trade options market? Is there any reason not to retain the trade
option exemption as issued herein?
a. What types of entities offer trade options pursuant to the
existing trade option exemption? Is the scope of the trade option
exemption offeror requirement in the interim final rule (i.e., offerors
must be ECPs or commercials) appropriate? Alternatively, is this
offeror requirement either too broad or too narrow?
b. Is the scope of the trade option exemption offeree requirement
in the interim final rule (i.e., offerees must be commercials)
appropriate? Alternatively, is this offeree requirement either too
broad or too narrow? Should ECPs that are not commercials be permitted
as offerees? Why or why not?
c. Is the list of commercials described in the interim final rule
(i.e., a producer, processor, or commercial user of, or a merchant
handling the commodity that is the subject of the commodity option
transaction, or the products or by-products thereof) appropriate?
Alternatively, is this description of commercials either too broad or
too narrow?
d. Is the range of commodity option transactions that would qualify
for the trade option exemption appropriate?
i. By requiring that a trade option, when exercised, must result in
the immediate (spot) or deferred (forward) shipment or delivery of an
exempt or agricultural commodity, would the interim final rule
improperly exclude other commodity option transactions, including other
transactions with optionality, that should be eligible for a trade
option exemption?
ii. In the alternative, is this physical delivery requirement of
the trade option exemption too broad?
e. Should the interim final rule retain the general exemptive
authority at Sec. 32.3(e)?
f. In connection with Sec. 32.3:
i. Is the requirement to comply with the part 45 recordkeeping
rules for all trade option participants appropriate?
ii. Is the requirement that certain trade options be reported
pursuant to the reporting provisions of part 45 appropriate?
1. Alternatively, should there be a de minimis threshold below
which part 45 reporting would not apply to a trade option transaction
and its participants (unless they are SDs/MSPs)?
2. If the response to the foregoing question is yes, should the de
minimis threshold be based on the underlying transactions (volume,
value, or some other measure), the participant characteristics, both,
or some other measure? Where practicable, please identify a specific
level at which a de minimis threshold may be set.
iii. In Sec. 32.3(b)(1)(i), the Commission provides that trade
options reporting for commodity options is required for counterparties
that have become obligated to comply with the reporting requirements of
part 45. The Commission understands that in some circumstances a
counterparty that transacts trade options may not, itself, be obligated
to report under part 45, but may be affiliated, at the enterprise or
group level, with another entity that complies with part 45. There may
be circumstances, therefore, where the obligation to report trade
options would be more appropriately based on trade options activity and
part 45 reporting at the enterprise or group level.
1. How often do cases occur in which a person that is subject to
part 45 receives, in the ordinary course of business, transaction-level
trade options information from a trade option counterparty affiliate
that is not subject to part 45?
[[Page 25330]]
2. Should Sec. 32.3(b)(1) be revised to account for such
situations and, if so, how? \55\
---------------------------------------------------------------------------
\55\ For example, should the requirement in Sec. 32.3(b)(1)(i)
to report trade options extend to trade options counterparties that
have become obligated to comply with the reporting requirements of
part 45, or are affiliated with a person that is required to comply
with the reporting requirements of part 45, provided that such an
affiliate obtains through the ordinary course of business
transaction-level information on the trade options entered into by
the counterparty? An ``affiliate'' is a person that is either
commonly owned or commonly controlled, consistent with existing CFTC
affiliate rules. Two persons would be commonly owned affiliates if
one party directly or indirectly holds a majority ownership interest
in the other, or if a third party directly or indirectly holds a
majority interest in both, based on holding a majority of the equity
securities of an entity, or the right to receive upon dissolution
the contribution of a majority of the capital of a partnership. Two
persons are commonly controlled affiliates if either (1) one person
possesses the power, directly or indirectly, to direct or cause the
direction of the management and policies of the other person whether
through the ownership of voting securities, by contract or otherwise
or (2) a third person possesses the power, directly or indirectly,
to direct or cause the direction of the management and policies of
both persons whether through the ownership of voting securities, by
contract or otherwise.
---------------------------------------------------------------------------
iv. Is the requirement that counterparties to unreported trade
options submit an annual notice filing, via Form TO, for the purpose of
notifying the Commission that such counterparty entered into one or
more unreported trade in the prior calendar year appropriate?
1. Alternatively, should these trade options be reported pursuant
to part 45, notwithstanding that these counterparties do not otherwise
comply with those requirements in connection with their swap trading
activities? What would be the costs and benefits of this alternative
condition? Please provide data and estimates to support your comments.
2. Should Form TO be required to be submitted more often (e.g.,
quarterly or monthly) and/or to require additional data fields (e.g.,
expired and/or open trade options and transaction specific data for
each unreported trade option)? What would be the costs associated with
requiring more frequent and/or more detailed filings? Please provide
data and estimates to support your comments.
v. Is the swaps large trader reporting condition (part 20)
appropriate for the trade option exemption?
vi. Is the position limit condition (part 151) appropriate for the
trade option exemption?
vii. Are the SD and MSP recordkeeping, reporting, and risk
management conditions, as applied via part 23, appropriate for SDs and
MSPs transacting under the trade option exemption?
viii. Is the condition retaining the applicability of CEA section
4s(e) (Capital and Margin Requirements for SDs and MSPs) appropriate?
ix. Are the antifraud, anti-manipulation, and enforcement related
conditions appropriate for the trade option exemption?
x. Since trade options have to be physically delivered and may only
be offered to commercials for use in their business as such, does it
makes sense to exclude trade options from the calculation of whether or
not a market participant is required to register as an SD or MSP?
Alternatively, is there any reason to include trade options in the
calculation of whether or not a market participant is required to
register as an SD or MSP?
3. Does the interim final rule issued herein omit or fail to
appropriately consider any other areas of concern regarding commodity
options?
4. The Commission also invites comments on the costs and benefits
considerations of the interim final rule under CEA section 15a, below.
The Commission specifically requests that commenters quantify the costs
and benefits, where practical.
Comments on these questions and the interim final rule must be
submitted to the Commission, pursuant to the instructions provided
above, on or before June 26, 2012.
VII. Related Matters
A. Cost Benefit Considerations
1. Background
Prior to the passage of the Dodd-Frank Act, the Commission's
regulations permitted certain commodity option transactions, including
``trade options.'' As described above and in the NPRM, trade options
are used by commercial entities entering into the commodity option
transactions solely for purposes related to their business involving
the commodity.\56\ Buyers and sellers of trade options transact
bilaterally off-exchange.\57\
---------------------------------------------------------------------------
\56\ 76 FR 6095, 6102, Feb. 3, 2011 (citing 17 CFR 32.4(a),
which exempts a commodity option when it is offered to ``a producer,
processor, or commercial user of, or a merchant handling, the
commodity which is the subject of the commodity option transaction,
or the products or by-products thereof, and that such producer,
processor, commercial user or merchant is offered or enters into the
commodity option transaction solely for purposes related to its
business as such'').
\57\ See 17 CFR 32.4. See also 17 CFR part 35 as in effect prior
to December 31, 2011. In addition, there was a stand-alone
regulatory regime for agricultural trade options set forth in pre
Dodd-Frank 17 CFR 32.13.
---------------------------------------------------------------------------
Under the pre-Dodd-Frank regulatory construct, neither the buyer
nor the seller of a commodity trade option were required to register
with the Commission, maintain books and records, or report their
transactions to the Commission in connection with their trade options
activity. As a result, the current trade option market is opaque,
affording virtually no regulatory visibility into its composition and
scope.\58\
---------------------------------------------------------------------------
\58\ As discussed further below, as a consequence, the
Commission is without reliable data from which to assess the size of
the commodity options market or the number or types of market
participants in it, which in turn makes quantification of the costs
and benefits of this rulemaking largely impracticable.
---------------------------------------------------------------------------
Congress altered the foundation for this regulatory construct in
passing the Dodd-Frank Act, by, among other things, determining that
the definition of ``swap'' would include, among other products,
commodity options. Section 721 of the Dodd-Frank Act added section
1a(47) to the CEA, defining ``swap'' to include not only ``any
agreement, contract, or transaction commonly known as,'' among other
things, ``a commodity swap,'' but also ``[an] option of any kind that
is for the purchase or sale, or based on the value, of 1 or more * * *
commodities * * *.'' \59\ In addition, the Dodd-Frank Act mandated
substantial changes in the swaps regulatory regime to reduce risk,
increase transparency, and promote market integrity within the
financial system.
---------------------------------------------------------------------------
\59\ Section 1(a)(47) specifically excludes from the definition
of ``swap'' any option on a contract of sale of a commodity for
future delivery (i.e., options on futures traded on designated
contract markets). See CEA section 1(a)(47)(B)(i).
---------------------------------------------------------------------------
This legislative act implicitly required the Commission to revisit
its historical treatment of commodity options, including trade options.
In so doing, the Commission is mindful that one of the purposes of the
Dodd-Frank Act is to increase transparency of the financial markets,
including the commodity options markets.
In response to the Dodd-Frank Act's definition of ``swap'' to
include options, on February 3, 2011, the Commission published in the
Federal Register a Notice of Proposed Rulemaking (``NPRM'') that
proposed to treat all commodity options (other than options on futures)
as swaps. In the NPRM, the Commission proposed to require that all such
commodity option transactions, including trade options, comply with the
requirements that apply to swaps generally. While the NPRM received
significant public comment, no commenter provided any quantitative data
on costs or benefits.
Comments to the NPRM from the Energy Working Group typified
commenters' concern that treating options on physical commodities like
[[Page 25331]]
any other swaps would impose significant costs:
Treating Physical Options transacted in such markets as
``swaps'' would create uncertainty and impose costly and duplicative
regulatory requirements.\60\
---------------------------------------------------------------------------
\60\ Energy Working Group at 2.
---------------------------------------------------------------------------
[T]he Working Group sees no reason the Commission should not
continue to treat Physical Options entered into by a commercial
entity as commercial transactions exempt from the majority of the
provisions of the CEA.\61\
---------------------------------------------------------------------------
\61\ Energy Working group at 11.
And in specific response to the NPRM's removal of the trade option
exemption provided for in pre-Dodd-Frank Sec. 32.4 of the Commission's
regulations, commenters urged the Commission to reconsider, as
exemplified by the following comments from APGA and EEI-EPSA,
---------------------------------------------------------------------------
respectively:
Although the Commission concludes that removal of the trade
option exemption will have limited impact on market participants
because of the swap end-user exemption, the regulatory requirements
which would apply if these cash contracts are treated as though they
are options would be enormous. First, characterizing these contracts
as options would require compliance with all of the swap rules,
including possibly requiring a natural gas producer whose only
business is selling the physical product to register as a swap
dealer.\62\
---------------------------------------------------------------------------
\62\ APGA at 4.
---------------------------------------------------------------------------
Regulations that make effective risk management tools and
physical supply more costly for end-users of swaps and commodity
options will result in higher and more volatile energy prices for
retail, commercial, and industrial customers.\63\
---------------------------------------------------------------------------
\63\ EEI-EPSA at 3.
The Commission also received specific comments requesting a trade
option exemption for options that, if exercised, result in physical
delivery.\64\ Commenters also explained the need to retain a trade
option exemption in the context of agricultural trade options.\65\
---------------------------------------------------------------------------
\64\ EEI-EPSA at 7-8.
\65\ Commodity Options and Agricultural Swaps Working Group at
3-4.
---------------------------------------------------------------------------
In this final rulemaking, the Commission is repealing and replacing
the Commission's regulations concerning commodity options. Upon
consideration of the comments to the NPRM, the Commission also is
adopting an interim final rule that incorporates an exemption for
``trade options.''
In the discussion that follows, the Commission considers the costs
and benefits of, and alternatives to, amending the regulations
applicable to commodity options, including the trade option exemption
that makes up the interim final rule, Sec. 32.3; this interim final
rule, the Sec. 32.3 trade option exemption, will operate as an
alternative to the general commodity options authorization in Sec.
32.2. The Commission considers these costs and benefits of its actions
in the discussion that follows.
2. Statutory Mandate To Consider the Costs and Benefits of the
Commission's Action: CEA Section 15(a)
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders. Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
the following five broad areas of market and public concern: (1)
Protection of market participants and the public; (2) efficiency,
competitiveness and financial integrity of futures markets; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission considers the costs and
benefits resulting from its own discretionary determinations with
respect to the section 15(a) factors.
The costs and benefits associated with the inclusion of commodity
options in the definition of swap in the Dodd-Frank Act are
attributable to Congress, and therefore beyond the scope of the
consideration of costs and benefits required by CEA section 15(a). The
Commission considers the costs and benefits attributable to its actions
in this rulemaking against the basic framework provided by the
statute--in which options are swaps subject to all of the requirements
attendant to that definition under the Dodd-Frank Act and the CEA (as
amended by Dodd-Frank Act).
In proposing the rules, the Commission requested comment on all
aspects of its cost benefit analysis, including the identification and
assessment of any costs and benefits not discussed in our analysis, and
data relevant to these costs and benefits. Several commenters provided
comments on the costs and benefits of the proposal in qualitative
terms, but none provided data from which to quantify costs and
benefits.
The opacity with which trade options historically have been
transacted affords the Commission no meaningful visibility with respect
to the composition and scope of trade option activities necessary to
quantify costs and benefits of this rulemaking. The lack of
quantification in comments reinforces this conclusion and further
demonstrates that there is no reasoned basis for determining how many
commercials engage in commodity options or, more specifically, trade
options. In other words, there is no reliable information from which to
assess the number of commercials that transact in commodity options
today, or will do so in the future. There is also no way determine the
number or type of entities that would choose to avail themselves of the
trade option exemption that is the subject of this interim final rule.
Notwithstanding these limitations, based on the comments received, it
is apparent that commercials place great importance on the continued
availability of a trade option exemption.
3. Benefits and Costs of the Final Rule
a. Benefits
The purpose and primary benefit of the final rule is to align the
Commission's general commodity options provisions in part 32 with the
Dodd-Frank swaps regime by providing, in general, that commodity
options that are swaps (i.e., commodity options other than options on
futures) will be treated the same as all other swaps, with one
exception: commodity options satisfying the terms of a revised trade
option exemption. The final rule is permissive and administrative in
nature, necessitated by the Commission's plenary rulemaking authority
over commodity options, which provides that: ``No person shall offer to
enter into, enter into or confirm the execution of, any transaction
involving any commodity regulated under this chapter which is [a
commodity option transaction], 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.'' \66\ As discussed above, the final rule also permits
DCM-traded options on underlying commodities, albeit under the
provisions of new part 32 rather than existing part 33. New part 32
permits commodity options to trade subject to the same rules applicable
to any other swap, and the Dodd-Frank Act permits swaps to be
transacted on a DCM. These changes will further the public benefits
Congress intended by applying the swaps statutory and regulatory
regimes to commodity options generally.
---------------------------------------------------------------------------
\66\ See CEA section 4c(b).
---------------------------------------------------------------------------
b. Costs
The Commission does not believe there are significant, if any,
costs associated with the final rule relative to the requirements
imposed by statute.
[[Page 25332]]
This is so because the final rule does not, by itself, impose any
substantive or administrative requirements on commodity option market
participants. Rather, by adopting this final rule, the Commission
provides the required general authorization for commodity options that
are subject to the swap definition, and removes any uncertainty as to
whether CEA section 4c(b) would otherwise prohibit such commodity
options. This is not to say that there are no significant costs
associated with transacting commodity options. Although not specific to
this final rule, there are costs attendant to the various regulations
applicable to transacting in commodity options, including the costs of
recordkeeping and reporting requirements. Those costs, however, are
discussed in the various swaps rules that impose the substantive
requirements.\67\
---------------------------------------------------------------------------
\67\ E.g., Large Trader Reporting for Physical Commodity Swaps,
76 FR 43851, Sept. 20, 2011; Position Limits for Futures and Swaps,
76 FR 71626, Nov. 18, 2011; and Swap Dealer and Major Swap
Participant Recordkeeping, Reporting, and Duties Rules; Futures
Commission Merchant and Introducing Broker Conflicts of Interest
Rules; and Chief Compliance Officer Rules for Swap Dealers, Major
Swap Participants, and Futures Commission Merchants, 77 FR 20128,
Apr. 3, 2012.
---------------------------------------------------------------------------
4. Interim Final Rule Benefits and Costs
a. Benefits
Under the CEA, as amended by the Dodd-Frank Act, the Commission is
under no statutory obligation to issue an exemption for trade options.
In fact, a plain reading of section 721 of the Dodd-Frank Act makes
clear that all commodity options are swaps, without any special
treatment of trade options. However, in light of the comments received,
the Commission believes that retaining a trade option exemption is in
the public interest.
The purpose and primary benefit of the interim final rule is that
it preserves a means for hedging by commercial market participants
through physically delivered options, albeit with important conditions
and modifications from the existing trade option exemption. More
specifically, the interim final rule provides a benefit (relative to
the statutory requirements) in the form of a cost-saving exemption from
certain swaps regulations for trade options on exempt and agricultural
commodities as between certain commercial and financially-sophisticated
counterparties. Additionally, the interim final rule benefits market
participants that meet the conditions of the trade option exemption by
eliminating the costs and inefficiencies that could result if the
Commission were to pursue the alternative of requiring entity- or
product-specific requests for exemptive orders.\68\
---------------------------------------------------------------------------
\68\ Nevertheless, the Interim Final Rule does permit
individuals to request exemptive orders on a case-by-case basis.
---------------------------------------------------------------------------
b. Costs
Although we consider certain costs that may result from the interim
final rule, and make comparisons to various alternatives, the
Commission does not believe that the interim final rule will impose
mandatory costs on any entity because the rule is exemptive, rather
than prescriptive, and entities are not required to rely on it.
Therefore, the Commission assumes that an entity will rely on the
exemption only if the anticipated benefits warrant the costs attendant
to the conditions the Commission is attaching to the exemption.
Notwithstanding this assumption, the conditions on the trade option
exemption may impose some costs on entities that choose to rely on it.
The interim final rule conditions the ability to transact trade
options under the exemption on the following: offerors must be ECPs or
commercials; offerees must be commercials; and the trade option, if
exercised, must result in physical delivery.
Under the interim final rule, those relying on the trade option
exemption must comply with certain regulatory requirements, including:
Recordkeeping and reporting; position limits; and large trader
reporting. While the conditions applicable to entities availing
themselves of the trade option exemption--for example, compliance with
position limits and large trader reporting, and subjection to the
various enforcement provisions \69\--are part of this Commission
action, most of the costs and benefits of those requirements are
discussed in other rulemakings, or are otherwise not expected to be
significant. The costs and benefits of the recordkeeping and reporting
obligations are discussed elsewhere.\70\ Moreover, reporting pursuant
to the swaps large trader rules in part 20 will only be required for
SDs and clearing members, and, based on the comments received on the
NPRM, few trade option buyers are likely to fall within either of these
categories. The speculative position limit rules of part 151 will only
apply to trade options that involve ``referenced contracts'' pursuant
to the terms of part 151, and the Commission expects that most trade
options entered into by commercial parties would be exempt from
position limits in any event based on a position limit exemption for
bona fide hedging transactions. The SD and MSP-specific conditions in
the trade option exemption, which incorporate certain provisions from
part 23, similarly do not impose any additional cost burden on SDs/MSPs
beyond the retention of existing rules applicable to SDs/MSPs.
---------------------------------------------------------------------------
\69\ See, e.g., Prohibition on the Employment, or Attempted
Employment, of Manipulative and Deceptive Devices and Prohibition on
Price Manipulation, 76 FR 41398, July 14, 2011.
\70\ See Swap Data Recordkeeping and Reporting Requirements, 77
FR 2136, Jan. 13, 2012 (``Recordkeeping and Reporting Rules'').
---------------------------------------------------------------------------
The costs attributable to the Commission's exercise of discretion
in this rulemaking--and that have not been considered in other
rulemakings--are those generated by the reporting and recordkeeping
requirements imposed upon commercials transacting in trade options but
not otherwise reporting their transactions. This action should reduce
costs relative to the basic statutory requirements (with no further
action by the Commission) which would have subjected all trade options
to the full array of regulatory requirements for swaps, including but
not limited to part 45. However, the Commission requests information
and estimates about the costs and benefits to market participants and
the public that would result from requiring market participants to
report on their trade options at two levels: (1) the enterprise or
group level (as described in section VI, question 2(f)(iii), above),
and (2) the person level as is provided for in the interim final rule
at Sec. 32.3(b)(1)(i).
c. Costs and Benefits as Compared to Alternatives
The range of alternative conditions available to the Commission
with respect to who may transact trade options is wide--that is, the
Commission could have decided that anyone or no one could be an offeror
or offeree. Either of these extremes, however, would render almost
meaningless either the exemption (if no one could be an offeror or an
offeree) or the option element of the swap definition (if anyone could
be an offeror or an offeree). Therefore, in striving to achieve the
optimal balance of allowing those with a commercial need to hedge the
price risk of a physical commodity while ensuring that there are enough
market participants to provide the necessary liquidity to hedge that
risk, the Commission determined to allow ECPs and non-ECP commercials
to be offerors. On the offeror side, excluding commercial non-ECPs
would have limited hedging opportunities available to non-ECPs who are
active users of trade options as both buyers and sellers,
[[Page 25333]]
depending on their commercial need. On the offeree side, the Commission
considered it important to preserve the integrity of the trade options
market for use by commercial users. If the rule had allowed entities
other than commercial users to be buyers, the trade option market would
be indistinguishable, arguably, from the general swaps market; there
would be no connection between a buyer's purchase of a trade option,
the trade option buyer's underlying commercial functions, and the
buyer's commercial need to make and take delivery.
Similarly, the Commission could have elected to make the exemption
available for trade options that, if exercised, result in either
physical or financial settlement of the option. The Commission limited
the condition to physical settlement out of a concern that if it
allowed financial settlement, parties could evade the requirements
otherwise applicable to swaps by merely labeling their transaction a
trade option even though it was unrelated to their business as a
commercial. The Commission notes, as did commenters, that the trade
option exemption is rooted in a need by commercials to hedge the price
risk of physical commodities, including but not limited to agricultural
and energy commodities. Permitting financially-settled trade options
would make this market, which is used for making or taking delivery of
physical commodities needed for a commercial function,
indistinguishable from the financial world of swaps and futures. In
addition, and as noted above, commenters focused on the need for a
trade option exemption specifically for physically delivered options.
The Commission did not receive similar comments regarding financially
settled transactions.
The Commission also had a range of alternatives with respect to
regulatory requirements applicable to trade option transactions. For
commercials, the Commission considered alternatives, ranging from
requiring full compliance with part 45 to no requirements in light of
its special call authority to request and obtain information. Given
that one of the purposes of the Dodd-Frank Act is to increase market
transparency and regulatory visibility into OTC markets, however, the
Commission does not believe an exemption with no attendant
recordkeeping or reporting requirements for commercials is a reasonable
alternative.\71\ At the same time, the Commission believes that
requiring full compliance with part 45's recordkeeping and reporting
requirements by commercials would be unnecessary to achieve the desired
and expected benefits of the interim final rule. Therefore, to mitigate
the costs of compliance for otherwise non-reporting counterparties, the
Commission is only requiring such counterparties to keep basic business
records regarding their trade options transactions and to file an
annual report with the Commission.\72\
---------------------------------------------------------------------------
\71\ See Recordkeeping an Reporting Rules, 77 FR at 2141, Jan.
13, 2012 (explaining that ``[c]omplete records regarding each swap
should be required from all counterparties, including non-SD/MSP
counterparties to physical commodity swaps and other swaps, because
such records are essential for effective market oversight and
prosecution of violations by the Commission and other regulators''
and that ``[e]xperience with recordkeeping requirements in the
context of futures suggests that all market participants are able to
retain such records'').
\72\ The annual report would require counterparties to
unreported trade options to provide: name and contact information;
commodity categories (agricultural, metals, energy, or other); and
approximate value (under $10 million, $10-100 million, over $100
million) of commodities purchased or delivered in connection with
options exercised during the prior calendar year.
---------------------------------------------------------------------------
The Commission believes that the recordkeeping requirement in the
interim final rule may result in additional costs for commercials that
currently do not maintain the now-required records. However, the
Commission believes that most, if not all, commercials already retain
the basic business records required by the new rule as a matter of good
business practice. With respect to reporting, the Commission believes
the form prescribed by the Commission for annual reports will entail
some administrative and legal costs for such commercials.
Additionally, because the Commission believes that a distinction
between agricultural commodities and other physical commodities is
unwarranted, it is permitting agricultural trade options to rely on the
revised general trade option exemption. The Commission declined to
adopt the alternative that would have maintained this historically
distinct treatment of trade options on agricultural commodities
because, as commenter NGFA stated, the distinction was unwieldy and,
consequently, the agricultural trade option (ATO) regime was largely
unused.\73\ The Commission also did not elect to carry over the $10
million net worth restriction under the existing ATO exemption in Sec.
32.13(g). The Commission anticipates that the new trade option
exemption will create new hedging opportunities for a wide range of
agricultural commercial market participants that have heretofore been
precluded from entering into trade options for agricultural commodities
by that net worth restriction.
---------------------------------------------------------------------------
\73\ NGFA at 2.
---------------------------------------------------------------------------
5. Section 15(a) Factors (of the Final Rule and Interim Final Rule, as
a Whole)
As noted above, in this final rule and interim final rule, the
Commission considers the costs and benefits that result from the
regulations issued herein.
a. Protection of Market Participants and the Public
The interim final rule trade option exemption will further the
protection of market participants and the public by ensuring that trade
options continue to be authorized, subject to recordkeeping and
reporting requirements, large trader reporting and position limit
requirements, certain SD/MSP rules, and explicit antifraud, anti-
manipulation, and enforcement protections. These requirements will
provide the Commission and the public with increased visibility into
this marketplace and will protect market participants from fraudulent
conduct by others. In the same way, the final rule permits commodity
options, generally, subject to the rules and protections applicable to
every other swap pursuant to the Dodd-Frank Act (and its related
rulemakings).
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
The trade option exemption provides an important hedging and risk
management tool for commercial market participants, while also
providing the Commission with vital visibility tools (i.e., the
recordkeeping and reporting requirements as well as the large trader
reporting requirement) to help ensure the integrity of these markets.
By permitting these valuable hedging and risk management tools, the
Commission is facilitating the ability of market participants to hedge
their risks more efficiently, since participants will have a larger set
of hedging mechanisms available to them. In addition, providing a
revised trade option exemption enhances competitiveness by continuing
to provide market participants with a range of risk management choices.
Finally, requiring option offerors to be ECPs or commercials enhances
financial integrity by helping to assure that option grantors will have
some minimal level of financial resources and sophistication, or will
be commercial in nature, in order to reduce the risk that a seller
would not be able to perform its obligations under a commodity option.
[[Page 25334]]
c. Price Discovery
The trade options marketplace will continue to augment the
exchange-traded financial markets in serving their price discovery
function for a subject commodity. The Commission notes that there will
be less price discovery for those trade options that are not otherwise
required to meet the part 45 reporting requirements. Nevertheless, the
Commission believes that the conditions discussed above should allow
the trade options market to continue functioning in a manner that
provides enough visibility to regulators. In addition, the Commission
would have the authority to request and obtain additional information
from trade option counterparties under its special call authority.
d. Sound Risk Management Procedures
The comments received on the NPRM (discussed above) highlighted
trade options as a fundamental risk management tool for commercial
users of many physical commodities. By issuing the interim final rule
trade option exemption, the Commission is facilitating the use of trade
options by these commercial market participants in conjunction with the
general Dodd-Frank swaps regime. Specifically, when exchange-traded
products do not provide the appropriate coverage or scope in connection
with a hedging need for a commercial market operation, the trade option
exemption will allow for agreements to be tailored by the parties on a
transaction-by-transaction basis in order to meet the physical delivery
needs of a commodity for a given commercial purpose. As noted above,
the final rule provides an equally important component of the
derivatives market (and a tool for risk management) by retaining a
general authority for commodity options that are not trade options.
e. Other Public Interest Considerations
The Commission believes that providing the revised trade option
exemption, in conjunction with the general authorization for all
commodity options, is consistent with the public interest (particularly
as demonstrated by the commenters) in providing effective and efficient
risk management tools to commercial market participants, as well as in
providing a strong legal framework for the trade options and general
options market. The Commission acknowledges that the revised trade
option exemption will remove those swaps that fall within it from
certain aspects of the Dodd-Frank regime to which they otherwise would
be subject. Nevertheless, based on its historical experience regulating
commodity options, and the proven past utility of a trade option
exemption for physical delivery options used by commercial parties, the
Commission believes that exercise of its CEA section 4c(b) plenary
authority to exempt trade options in the interim final rule is
appropriate and benefits the public interest. In addition, the
recordkeeping and reporting requirements, as well as the other
conditions discussed above, should allow the trade options market to
continue functioning in a manner that provides sufficient visibility to
regulators.
6. Request for Comment on CBC in Connection With Interim Final Rule
After considering the section 15(a) factors, the Commission has
determined to issue part 32 and the amendments to part 33 as described
herein. The Commission invites public comment on its cost-benefit
considerations in connection with the interim final rule trade option
exemption. Commenters are encouraged to submit any data or other
information that they may have quantifying or qualifying the costs and
benefits of the interim final rule trade option exemption with their
comment letters. In addition, the Commission seeks comment on whether
the offeror requirement imposes any additional costs, particularly when
compared with the general Dodd-Frank swaps regime, which does not
otherwise provide for the trade option classification, and whether
limiting the trade option exemption to physically delivered contracts
(and requiring all other commodity options to transact under the
general swaps rules) imposes any significant or unreasonable cost on
market participants.
B. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they issue will have a significant economic
impact on a substantial number of small entities and, if so, provide a
regulatory flexibility analysis respecting the impact.\74\ The final
rule, in amending part 33, would affect entities that currently engage
in options on physical commodities on a DCM, and the final rule and
interim final rule, in replacing part 32, would affect those entities
that currently engage in options under Sec. 32.4 and Sec. 32.13(g).
By generally mandating that commodity options be treated as all other
swaps, with one exemption for trade options, the effect of the rules
has the potential to affect designated contract markets (``DCMs''),
derivatives clearing organizations (``DCOs''), futures commission
merchants (``FCMs''), large traders and eligible contract participants
(``ECPs''), as well as SDs, MSPs, commodity pool operators (``CPOs''),
swap execution facilities (``SEFs''), swap data repositories
(``SDRs''), and certain non-ECP commercial market participants that
enter into trade options.
---------------------------------------------------------------------------
\74\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------
1. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESP
The Commission has previously determined that DCMs, DCOs, FCMs,
CPOs, large traders, ECPs, and eligible swap participants (``ESPs'')
are not small entities for purposes of the Regulatory Flexibility
Act.\75\ Accordingly, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that the final and interim final
rules adopted herein will not have a significant economic impact on a
substantial number of small entities with respect to these entities.
---------------------------------------------------------------------------
\75\ See, respectively and as indicated, 47 FR 18618, 18619,
Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); 66 FR 45604,
45609, Aug. 29, 2001 (DCOs); 66 FR 20740, 20743, Apr. 25, 2001
(ECPs); and 57 FR 53627, 53630, Nov. 12, 1992 and 58 FR 5587, 5593,
Jan. 22, 1993 (ESPs).
---------------------------------------------------------------------------
The Commission received one comment from the Power Coalition
asserting that certain of its member entities may both be ECPs under
the CEA and small businesses under the RFA. These members, as the
Commission understands, have been determined to be small entities by
the Small Business Administration (``SBA'') because they are
``primarily engaged in the generation, transmission, and/or
distribution of electric energy for sale and [their] total electric
output for the preceding fiscal year did not exceed 4 million megawatt
hours.'' \76\ For all entities that may both be ECPs and have been
determined by the SBA to be small businesses under the RFA, the initial
regulatory flexibility analysis in the proposed rulemaking and the
final regulatory flexibility analysis, in subsection ``5'' below,
discusses the impact of the rulemaking on small entities.
---------------------------------------------------------------------------
\76\ Small Business Administration, Table of Small Business Size
Standards, (Nov. 5, 2010).
---------------------------------------------------------------------------
2. SDs, MSPs, SEFs, and SDRs
SDs, MSPs, SEFs, and SDRs are new categories of registrant under
the Dodd-Frank Act. Pursuant to various Dodd-Frank rulemakings, the
Commission has determined that SDs, MSPs, SEFs, and SDRs are not
``small entities'' for purposes of the RFA.\77\ Accordingly, the
[[Page 25335]]
Chairman, on behalf of the Commission, hereby certifies pursuant to 5
U.S.C. 605(b) that the final and interim final rules adopted herein,
with respect to SDs, MSPs, SEFs, and SDRs, will not have a significant
impact on a substantial number of small entities.
---------------------------------------------------------------------------
\77\ See respectively, Registration of Swap Dealers and Major
Swap Participants, 77 FR 2613, 2620, Jan. 19, 2012 (swap dealers and
major swap participants); Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR
63732, 63745, Oct. 18, 2010 (SEFs); and Swap Data Repositories, 75
FR 80898, 80926, Dec. 23, 2010 (SDRs).
---------------------------------------------------------------------------
3. Entities Eligible To Engage in Options on Physical Commodities on
DCMs Under Part 33
Under the current part 33, there is no regulatory financial
threshold that must be met in order to engage in options on underlying
commodities on a DCM, so small entities would be eligible to engage in
such transactions. In fact, there is no regulatory financial threshold
that must be met in order to engage in any type of transaction on a
DCM. As noted above, new CEA section 1a(47) provides that options,
other than options on futures, are swaps. New CEA section 2(e) provides
that non-ECPs may enter into swaps, if the swaps are entered into on a
DCM. Therefore, even though an option on an underlying commodity is
defined to be a swap under the Dodd-Frank Act, small entities will
continue to be eligible to enter into such options on a DCM under the
rules issued herein, just as they are eligible to enter into such
options on a DCM under the current part 33. Thus, the final and interim
final rules will have no effect on the eligibility of small entities to
enter into an option on an underlying commodity on a DCM. Accordingly,
the Chairman, on behalf of the Commission, hereby certifies pursuant to
5 U.S.C. 605(b) that the final and interim final rules will not have a
significant economic impact on a substantial number of small entities
with respect to entities eligible to engage in options on underlying
commodities on DCMs under part 33.
4. Entities Engaged in Options Under Sec. 32.13(g)
The Commission addressed the question of whether entities engaged
in agricultural trade options under Sec. 32.13(g) are, in fact,
``small entities'' for purposes of the RFA in the NPRM. In the NPRM,
the Commission determined that entities engaged in options under Sec.
32.13(g) were not small entities.\78\ As noted above, the Commission
previously has determined that ECPs are not small entities for the
purpose of the RFA based upon, among other things, the financial and
institutional requirements contained in the definition. Also as noted
above, the exemption at Sec. 32.13(g) allows for options on the
enumerated agricultural commodities to be sold when: (1) The option is
offered to a commercial (``a producer, processor, or commercial user
of, or a merchant handling'' the underlying commodity); (2) the
commercial enters the transaction solely for purposes related to its
business as such; and (3) each party to the option contract has a net
worth of not less than $10 million. There are two analogous provisions
in the ECP definition, new CEA sections 1a(18)(A)(v)(III) and
1a(18)(A)(xi)(II). New CEA section 1a(18)(A)(v)(III) provides that an
ECP includes a corporation, partnership, proprietorship, organization,
trust, or other entity that has a net worth exceeding $1,000,000 and
enters into a swap in connection with the entity's business or to
manage the risk associated with an asset or liability owned or incurred
or reasonably likely to be owned or incurred by the entity in the
conduct of the entity's business. New CEA section 1a(18)(A)(xi)(II)
provides that an ECP includes an individual who has assets invested on
a discretionary basis, the aggregate of which is in excess of
$5,000,000 and who enters the swap in order to manage the risk
associated the an asset owned or liability incurred, or reasonably
likely to be owned or incurred, by the individual. The participation
requirements of Sec. 32.13(g)(1) are similar to, if not more
restrictive than, the analogous ECP provisions.
---------------------------------------------------------------------------
\78\ See 76 FR 6095, at 6107, Feb. 3, 2011.
---------------------------------------------------------------------------
For purposes of the RFA in this rulemaking, the Commission is
hereby determining that entities engaged in options under Sec.
32.13(g) are not considered to be ``small entities'' for essentially
the same reasons that ECPs have previously been determined not to be
small entities. Accordingly, the Chairman, on behalf of the Commission,
hereby certifies pursuant to 5 U.S.C. 605(b) that the final and interim
final rules, with respect to entities engaged in options under Sec.
32.13(g), will not have a significant impact on a substantial number of
small entities.
5. Entities Engaged in Options Under Existing Sec. 32.4
In the NPRM, the Commission initially addressed the question of
whether entities engaged in trade options under the existing trade
options rule are, in fact, ``small entities'' for purposes of the
RFA.\79\ As noted above, under the existing trade options rule, an
option must be offered to a producer, processor, or commercial user of,
or a merchant handling, the commodity, who enters into the commodity
option transaction solely for purposes related to its business as such.
The existing trade option exemption does not include any net worth
requirement.
---------------------------------------------------------------------------
\79\ See 76 FR 6095, at 6017-6018, Feb. 3, 2011.
---------------------------------------------------------------------------
Because there is no net worth requirement in the existing trade
option rule, thus allowing commercial entities of any economic status
to enter into trade option transactions, the Commission is not in a
position to determine whether entities engaged in options under the
existing trade option rule include a substantial number of small
entities on which the rule would have a significant economic impact.
Therefore, the Commission provided an initial regulatory flexibility
analysis in the NPRM addressing the proposed withdrawal of the existing
trade option exemption on small entities. In the NPRM, the Commission
identified the small entities that would be affected by the proposed
withdrawal as any commercial small entity that would be smaller than an
ECP and additionally would have annual receipts of less than
$750,000.\80\
---------------------------------------------------------------------------
\80\ 5 U.S.C. 601(6) (threshold for certain agricultural
entities under the RFA).
---------------------------------------------------------------------------
As referenced above, the Commission received a comment from the
Power Coalition that may indicate that certain of their members, in
particular entities that are ``primarily engaged in the generation,
transmission, and/or distribution of electric energy for sale and
[their] total electric output for the preceding fiscal year did not
exceed 4 million megawatt hours,'' have been determined by the SBA to
be small entities. Such entities may enter into option transactions,
though the Commission does not have sufficient information to determine
that any such entities would constitute a substantial number of small
entities for purposes of the RFA.
Moreover, for those entities that may enter into option
transactions that would be ECPs with annual receipts greater than
$750,000, but that also may be small entities as determined by SBA, it
was not indicated in comments to the initial regulatory flexibility
analysis that the effect of the proposed rulemaking would be any
greater for these entities than for the smaller entities the Commission
identified in the initial analysis. Indeed, on a relative basis, the
larger the entity, the less of an effect the rulemaking should have.
Critically, unlike a non-ECP, which will be unable to engage in option
transactions except
[[Page 25336]]
on a DCM, and (if a commercial) through trade options, an entity that
is both an ECP, as that term is defined in the CEA, and a small entity,
as determined by the SBA, will not be so restricted.
Therefore, the Commission offers, pursuant to 5 U.S.C. 604, the
following final regulatory flexibility analysis:
A description of the reasons why action by the agency is
being considered.
The Commission is taking this regulatory action to withdraw the
existing trade option exemption because the Dodd-Frank Act has defined
the term ``swap'' to include options. This new definition renders the
existing trade option exemption obsolete in its current form.
Responding to comments received on its NPRM, a revised trade option
exemption is being issued as interim final rule Sec. 32.3.
A succinct statement of the objectives of, and legal basis
for, the rule.
The objective for issuing interim final rule Sec. 32.3, is to make
the Commission's regulations comport with the CEA as revised by the
Dodd-Frank Act. As stated previously, the legal basis for the rule is
the CEA definition of swap, section 1a(47)(A)(i), and the Commission's
plenary options authority, CEA section 4c(b).
A description of and, where feasible, an estimate of the
number of small entities to which the rule will apply.
The small entities to which the withdrawal of the trade option
exemption and issuance of the final rule may apply are those commercial
small entities that would be smaller than an ECP and additionally would
have annual receipts of less than $750,000, or those commercial
entities that would be an ECP with annual receipts of greater than
$750,000 but that have been determined by SBA to be a small entity by
virtue of the level of total electric output for the preceding fiscal
year or equivalent metrics that would result in the entity being a
small entity under the RFA.\81\ Because there are no reporting or
registration requirements in the existing trade option exemption, it is
difficult to quantify the exact number of small entities, if any, to
which the rule may apply, and whether such entities in the aggregate
would constitute a substantial number of small entities compared to the
universe of entities to which the rule could apply. However, the
impact, if any, is largely mitigated by the inclusion of interim final
rule Sec. 32.3, a revised trade option exemption that will continue to
be available for small entities that are, generally speaking,
commercial actors entering into a commodity option for commercial
purposes--including non-ECPs.
---------------------------------------------------------------------------
\81\ 5 U.S.C. 601(6). See also note 76, above, which relates to
the Power Coalition's concern that certain entities that meet or
exceed the CEA's ECP thresholds may still be small entities for
purposes of the RFA. This initial regulatory flexibility analysis
applies equally to such entities.
---------------------------------------------------------------------------
A description of the projected reporting, recordkeeping,
and other compliance requirements of the rule, including an estimate of
the classes of small entities which will be subject to the requirement
and the type of professional skills necessary for preparation of the
report or record.
The withdrawal of the existing trade option exemption does not
impose any reporting, recordkeeping, or other compliance requirements.
However, because the Dodd-Frank Act provides that options are swaps,
the swaps rules being promulgated under the Dodd-Frank Act in other
rulemakings will contain reporting, recordkeeping, and other compliance
requirements. In addition, the interim final rule trade option
exemption at Sec. 32.3, issued herein, includes certain compliance
obligations. However, those conditions do not impose any significant
burden or requirement on a small entity that has not been or will not
be imposed through another rulemaking, for which the Commission has, in
its discretion, addressed RFA compliance separately,\82\ or by self-
execution of the CEA as amended by the Dodd-Frank Act.
---------------------------------------------------------------------------
\82\ See 5 U.S.C. 605(c).
---------------------------------------------------------------------------
For example, the large trader reporting condition references part
20, and would only fall on part 20 reporting entities, SDs and clearing
members, and not on any small entity. The position limits condition
would only apply part 151 position limits to the same extent they would
apply to any other swap transaction entered into by the small entity.
The SD/MSP rules from part 23 only apply to SDs and MSPs and not to any
small entity. The antifraud and anti-manipulation condition has and
will always apply to every entity transacting under the Commission's
jurisdiction. In addition, the part 45 recordkeeping and reporting
requirements in the trade option exemption generally only require
recordkeeping and reporting to the same extent that such rules apply to
any other swap, which the Commission has determined does not constitute
a significant new burden as applied in the context of this rulemaking.
The new Form TO annual notice filing requirement further mitigates
the burden of the reporting requirement for counterparties who only
engage in unreported trade options. The form is necessary to give the
Commission at least a general overview, for market surveillance
purposes, of the counterparties engaging in otherwise unreported trade
options, and the types and approximate value of the commodities
involved in such options. The form also provides contact information in
case Commission surveillance staff needs to contact trade option
counterparties to seek more detailed information regarding market
events. While Form TO is a new form, and thus a new requirement for
those required to file, it is a single annual filing, seeking very
general and easily accessible information. The alternative to using
form TO would be to apply the full part 45 reporting regulations.
An identification, to the extent practicable, of all
relevant Federal rules which may duplicate, overlap or conflict with
the rule.
Small entities that do not qualify as ECPs will be unable to engage
in options transactions except on a DCM under an existing regulatory
scheme, or if commercials, pursuant to the new trade option exemption
in interim final rule Sec. 32.3. The trade option exemption at interim
final rule Sec. 32.3 may be relied upon by a non-ECP that is a
producer, processor, or commercial user of, or a merchant handling the
commodity that is the subject of the commodity option transaction, or
the products or by-products thereof, and that is offering or entering
into the commodity option transaction solely for purposes related to
its business as such. This provision will continue to permit many
transactions that currently transact pursuant to the existing trade
option exemption. The primary significant new requirement for trade
options participants is the application of the recordkeeping and
reporting requirement of part 45 (as well as the other trade option
conditions, discussed above), and/or the Form TO notice filing
requirement. Accordingly, there will be no rules applicable to the
small entities, under the interim final rule trade option exemption,
that duplicate, overlap, or conflict with any other Federal rules.
Description of any significant alternatives to the rule
which accomplish the stated objectives of applicable statutes and which
minimize any significant economic impact of the rule on small entities.
These may include, for example: (1) The establishment of differing
compliance or reporting requirements or timetables that take into
account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance and
[[Page 25337]]
reporting requirements under the rule for such small entities; (3) the
use of performance rather than design standards; and (4) an exemption
from coverage of the rule, or any part thereof, for such small
entities.
A potential alternative to limiting trade options under the
existing trade option exemption to the requirements under interim final
rule Sec. 32.3 (i.e., commercial participants and physically settled
options) would be to either (1) delete the existing trade option and
not replace it, or (2) create a special rule to allow any non-ECP to
engage in such transactions and to allow such transactions to be either
physically or financially settled. As explained in this document, and
as stressed by the commenters, to adopt option (1) as a final rule
(deleting the trade option provision altogether) would have been
prohibitively costly and would have had a significant negative impact
on hedging opportunities available to small entities. With regard to
option (2), and as described above, interim final rule Sec. 32.3
provides an exemption for certain commercial parties entering into
physical commodity options for commercial purposes. Based on the
comments received in response to the NPRM, discussed above, the
Commission has determined that to treat all trade options in the same
manner as any other swap (including permitting commodity options for
all participants on a DCM), with the addition of the trade option
exemption at Sec. 32.3, will provide an appropriate and flexible
framework for the overwhelming majority of commodity options
participants that will seek to rely on the trade option exemption. In
addition, to retain a trade option exemption with no participant
requirements and no physical delivery requirement would potentially
undermine many of the market and consumer protections embodied in the
swaps provisions of the Dodd-Frank Act.
C. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501
et seq. (``PRA'') are, among other things, to minimize the paperwork
burden to the private sector, ensure that any collection of information
by a government agency is put to the greatest possible uses, and
minimize duplicative information collections across the government.\83\
The PRA applies to all information, ``regardless of form or format,''
whenever the government is ``obtaining, causing to be obtained [or]
soliciting'' information, and includes required ``disclosure to third
parties or the public, of facts or opinions,'' when the information
collection calls for ``answers to identical questions posed to, or
identical reporting or recordkeeping requirements imposed on, ten or
more persons.'' \84\ The PRA requirements have been determined to
include not only mandatory but also voluntary information collections,
and include both written and oral communications.\85\ Under the PRA'',
an agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless it displays a currently
valid control number from the Office of Management and Budget
(``OMB''). With the exception of the new Form TO annual notice filing
requirement, discussed below, the Commission believes that these rules
will not impose any new information collection requirements that
require approval of OMB under the PRA. The Commission notes that these
rules will involve the withdrawal of certain provisions related to
Commission forms, and will ultimately result in the expiration,
cancellation, or removal of such forms.\86\ Because the rules would
ultimately result in removing or deleting form filing and/or
recordkeeping burdens, they will not result in the creation of any new
information collection subject to OMB review or approval under the PRA,
except for the new Form TO annual notice filing requirement discussed
below. As a general matter, these rules would allow commodity options
to trade under the same terms and conditions as all other swaps and
these rules do not, by themselves, impose any new information
collection requirements other than those that exist or have been
proposed in the Commission's general swap-related Dodd-Frank
rulemakings. The same analysis applies with respect to the general
conditions applicable under the trade option exemption in Sec.
32.3(b)--which conditions would only apply to the same extent they
would apply to any other swap. Similarly, the application of the part
45 recordkeeping and reporting requirements to trade options, via
interim final rule Sec. 32.3(b), only imposes such requirements to the
same extent they would apply to any other swap. That is, these specific
recordkeeping and reporting costs have been accounted for in the
information collection prepared by the Commission with respect to its
part 45 rules. Also, collections of information that may be associated
with engaging in commodity options or trade options are, or will be,
addressed within each of the general swap-related rulemakings
implementing the Dodd-Frank Act.\87\ To avoid creating duplicative PRA
estimates, the Commission is not accounting again for those costs with
respect to this rulemaking. Therefore, this final rule and interim
final rule do not constitute a new collection of information by the
Commission, other than those that may be associated with the new Form
TO annual notice filing requirement.
---------------------------------------------------------------------------
\83\ See 44 U.S.C. 3501.
\84\ See 44 U.S.C. 3502.
\85\ See 5 CFR 1320.3(c)(1).
\86\ This includes any forms that relate to the agricultural
trade option rules in current 17 CFR 32.13 and the dealer option
rules in current 17 CFR 32.12.
\87\ See, e.g., Position Limits for Futures and Swaps, 76 FR
71626 at 71680-71683, Nov. 18, 2011; Large Trader Reporting for
Physical Commodity Swaps, 76 FR 43851 at 43860-43862, July 22, 2011;
Swap Data Recordkeeping and Reporting Requirements 77 FR 2136, at
2171-2176, Jan. 13, 2012; and Swap Dealer and Major Swap Participant
Recordkeeping and Reporting, Duties, and Conflicts of Interest
Policies and Procedures; Futures Commission Merchant and Introducing
Broker Conflicts of Interest Policies and Procedures; Swap Dealer,
Major Swap Participant, and Futures Commission Merchant Chief
Compliance Officer, 77 FR 20128, Apr. 3, 2012.
---------------------------------------------------------------------------
As noted above, the interim final rule imposes a new Form TO annual
notice filing requirement on counterparties to unreported trade
options, which requirement is considered to be a collection of
information within the meaning of the PRA. The Commission therefore is
required to submit to OMB an information collection request for review
and approval in accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR
1320.8(d). The Commission will, by separate action, publish in the
Federal Register a notice and request for comment on the paperwork
burden associated with the interim final rule's Form TO annual notice
filing requirement in accordance with 5 CFR 1320.8 and 1320.10. If
approved, this new collection of information will be mandatory. As
noted above, the Form TO annual notice filing would not be due to the
Commission for the first time until March 1, 2014, for counterparties
that enter into one or more unreported trade options during the 2013
calendar year.
The Commission specifically invites public comment on the accuracy
of its estimate that no additional information collection requirements
or changes to existing collection requirements, other than Form TO,
would result from the interim final rule trade option exemption issued
herein.
[[Page 25338]]
VIII. Final Rule and Interim Final Rule
List of Subjects
17 CFR Part 3
Administrative practice and procedure, Brokers, Commodity futures,
Reporting and recordkeeping requirements.
17 CFR Part 32
Commodity futures, Consumer protection, Fraud, Reporting and
recordkeeping requirements.
17 CFR Part 33
Commodity futures, Consumer protection, Fraud, Reporting and
recordkeeping requirements.
In consideration of the foregoing and pursuant to the authority
contained in the Act, as indicated herein, the Commission hereby amends
chapter I of title 17 of the Code of Federal Regulations as follows:
PART 3--REGISTRATION
0
1. The authority citation for part 3 continues to read as follows:
Authority: 5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a,
13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of the
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L.
111-203, 124 Stat. 1376 (July 21, 2010).
Sec. 3.13 [Removed and Reserved]
0
2. Remove and reserve Sec. 3.13.
0
3. Revise part 32 to read as follows:
PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS
Sec.
32.1 Scope.
32.2 Commodity option transactions; general authorization.
32.3 Trade options.
32.4 Fraud in connection with commodity option transactions.
32.5 Option transactions entered into prior to the effective date of
this part.
Appendix A to 17 CFR Part 32
Authority: 7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.
Sec. 32.1 Scope.
The provisions of this part shall apply to all commodity option
transactions, except for commodity option transactions on a contract of
sale of a commodity for future delivery conducted or executed on or
subject to the rules of either a designated contract market or a
foreign board of trade.
Sec. 32.2 Commodity option transactions; general authorization.
Subject to Sec. Sec. 32.1, 32.4, and 32.5, which shall in any
event apply to all commodity option transactions, it shall be unlawful
for any person or group of persons to offer to enter into, enter into,
confirm the execution of, maintain a position in, or otherwise conduct
activity related to any transaction in interstate commerce that is a
commodity option transaction, unless:
(a) Such transaction is conducted in compliance with and subject to
the provisions of the Act, including any Commission rule, regulation,
or order thereunder, otherwise applicable to any other swap, or
(b) Such transaction is conducted pursuant to Sec. 32.3.
Sec. 32.3 Trade options.
(a) Subject to paragraphs (b), (c), and (d) of this section, the
provisions of the Act, including any Commission rule, regulation, or
order thereunder, otherwise applicable to any other swap shall not
apply to, and any person or group of persons may offer to enter into,
enter into, confirm the execution of, maintain a position in, or
otherwise conduct activity related to, any transaction in interstate
commerce that is a commodity option transaction, provided that:
(1) Such commodity option transaction must be offered by a person
that has a reasonable basis to believe that the transaction is offered
to an offeree as described in paragraph (a)(2) of this section. In
addition, the offeror must be either:
(i) An eligible contract participant, as defined in section 1a(18)
of the Act, as further jointly defined or interpreted by the Commission
and the Securities and Exchange Commission or expanded by the
Commission pursuant to section 1a(18)(C) of the Act; or
(ii) A producer, processor, or commercial user of, or a merchant
handling the commodity that is the subject of the commodity option
transaction, or the products or by-products thereof, and such offeror
is offering or entering into the commodity option transaction solely
for purposes related to its business as such;
(2) The offeree must be a producer, processor, or commercial user
of, or a merchant handling the commodity that is the subject of the
commodity option transaction, or the products or by-products thereof,
and such offeree is offered or entering into the commodity option
transaction solely for purposes related to its business as such; and
(3) The commodity option must be intended to be physically settled,
so that, if exercised, the option would result in the sale of an exempt
or agricultural commodity for immediate or deferred shipment or
delivery.
(b) In connection with any commodity option transaction entered
into pursuant to paragraph (a) of this section, every counterparty
shall comply with the swap data recordkeeping requirements of part 45
of this chapter, as otherwise applicable to any swap transaction, and
shall:
(1) Comply with the swap data reporting requirements of part 45 of
this chapter to the extent that the commodity option involves at least
one counterparty (whether as offeror or offeree) that has--
(i) Become obligated to comply with the reporting requirements of
part 45,
(ii) As a reporting party,
(iii) During the twelve month period preceding the date on which
the trade option is entered into,
(iv) In connection with any non-trade option swap trading activity;
or
(2) For any counterparty that enters into one or more commodity
options pursuant to Sec. 32.3(a) in a calendar year that do not
involve a counterparty described in paragraph (b)(1) of this section,
file with the Commission by March 1 of the following year an ``Annual
Notice Filing for Counterparties to Unreported Trade Options'' on Form
TO, as set forth in Appendix A to this part, to be completed and
submitted in accordance with the instructions thereto and as further
directed by the Commission.
(c) In connection with any commodity option transaction entered
into pursuant to paragraph (a) of this section, the following
provisions shall apply to every trade option counterparty to the same
extent that such provisions would apply to such person in connection
with any other swap:
(1) Part 20 (Swaps Large Trader Reporting) of this chapter;
(2) Part 151 (Position Limits) of this chapter;
(3) Subpart J of part 23 (Duties of Swap Dealers and Major Swap
Participants) of this chapter;
(4) Sections 23.200, 23.201, 23.203, and 23.204 of subpart F of
part 23 (Reporting and Recordkeeping Requirements for Swap Dealers and
Major Swap Participants) of this chapter; and
(5) Section 4s(e) of the Act (Capital and Margin Requirements for
Swap Dealers and Major Swap Participants).
(d) In addition, any person or group of persons offering to enter
into, entering into, confirming the execution of, maintaining a
position in, or otherwise conducting activity related to a commodity
option transaction in interstate commerce pursuant to paragraph (a) of
this section shall remain subject to part 180 (Prohibition
[[Page 25339]]
Against Manipulation) and Sec. 23.410 (Prohibition on Fraud,
Manipulation, and other Abusive Practices) of this chapter and the
antifraud, anti-manipulation, and enforcement provisions of CEA
sections 2, 4b, 4c, 4o, 4s(h)(1)(A, 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.
(e) The Commission may, by order, upon written request or upon its
own motion, exempt any person, either unconditionally or on a temporary
or other conditional basis, from any provisions of this part, and the
provisions of the Act, including any Commission rule, regulation, or
order thereunder, otherwise applicable to any other swap, other than
Sec. 32.4, part 180 (Prohibition Against Manipulation), and Sec.
23.410 (Prohibition on Fraud, Manipulation, and other Abusive
Practices) of this chapter, and the antifraud, anti-manipulation, and
enforcement provisions of CEA sections 2, 4b, 4c, 4o, 4s(h)(1)(A),
4s(h)(4)(A), 6, 6c, 6d, 9, 13, if it finds, in its discretion, that it
would not be contrary to the public interest to grant such exemption.
Sec. 32.4 Fraud in connection with commodity option transactions.
In or in connection with an offer to enter into, the entry into, or
the confirmation of the execution of, any commodity option transaction,
it shall be unlawful for any person directly or indirectly:
(a) To cheat or defraud or attempt to cheat or defraud any other
person;
(b) To make or cause to be made to any other person any false
report or statement thereof or cause to be entered for any person any
false record thereof; or
(c) To deceive or attempt to deceive any other person by any means
whatsoever.
Sec. 32.5 Option transactions entered into prior to the effective
date of this part.
Nothing contained in this part shall be construed to affect any
lawful activities that occurred prior to the effective date of this
part.
Appendix A to 17 CFR Part 32
BILLING CODE P
[[Page 25340]]
[GRAPHIC] [TIFF OMITTED] TR27AP12.004
[[Page 25341]]
[GRAPHIC] [TIFF OMITTED] TR27AP12.005
[[Page 25342]]
[GRAPHIC] [TIFF OMITTED] TR27AP12.006
[[Page 25343]]
[GRAPHIC] [TIFF OMITTED] TR27AP12.007
BILLING CODE C
PART 33--REGULATION OF COMMODITY OPTION TRANSACTIONS THAT ARE
OPTIONS ON CONTRACTS OF SALE OF A COMMODITY FOR FUTURE DELIVERY
0
4. The authority citation for part 33 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19, and 21, otherwise noted.
0
5. Revise the part heading to read as set forth above.
0
6. In Sec. 33.2, revise paragraph (b) to read as follows:
Sec. 33.2 Applicability of Act and rules; scope of part 33.
* * * * *
(b) The provisions of this part apply to commodity option
transactions that are options on contracts of sale of a commodity for
future delivery except for commodity option transactions that are
options on contracts of sale of a commodity for future delivery
conducted or executed on or subject to the rules of a foreign board of
trade.
* * * * *
Sec. 33.4 [Amended]
0
7. Amend Sec. 33.4 as follows:
0
a. Remove the words ``or for options on physicals in any commodity
regulated under the Act,'' in the introductory text;
0
b. Remove and reserve paragraphs (a)(4) and (a)(5)(iv);
0
c. Remove the phrase ``or underlying physical'' from paragraph
(b)(1)(iii); and
0
d. Remove the phrase ``, options on physicals,'' from paragraph (d)(3).
0
8. In Sec. 33.7:
0
a. Amend paragraph (b) introductory text by revising the second
paragraph of the Options Disclosure Statement;
0
b. Remove the phrase ``or underlying physical commodity'' wherever it
appears in paragraph (b)(1) including its undesignated paragraphs;
0
c. Remove the phrase ``(e.g., commitment to sell the physical)'' from
the fourth undesignated paragraph under paragraph (b)(1);
0
d. Revise the fifth undesignated paragraph under paragraph (b)(1);
0
e. Remove the phrase ``or physical commodity'' from paragraph (b)(2)
introductory text and paragraph (b)(2)(i);
0
f. Remove the phrase ``or underlying physical commodity'' from
paragraph (b)(5) both times it appears;
0
j. Revise the undesignated paragraph following paragraph (b)(5);
0
k. Remove the phrase ``or underlying physical commodity'' from
paragraph (b)(6);
0
l. Remove the phrase ``or the physical commodity'' and the phrase ``or
underlying physical commodity'' from paragraph (b)(7)(ii);
[[Page 25344]]
0
m. Remove and reserve paragraph (b)(7)(iv); and
0
o. Remove the phrase ``or underlying physical commodity'' from
paragraphs (b)(7)(v) and (x).
The revisions read as follows:
Sec. 33.7 Disclosure.
* * * * *
(b) * * *
Options Disclosure Statement
* * * * *
BOTH THE PURCHASER AND THE GRANTOR SHOULD KNOW THAT THE OPTION IF
EXERCISED, RESULTS IN THE ESTABLISHMENT OF A FUTURES CONTRACT (AN
``OPTION ON A FUTURES CONTRACT'').
* * * * *
(1) * * *
The grantor of a put option on a futures contract who has a short
position in the underlying futures contract is subject to the full risk
of a rise in the price in the underlying position reduced by the
premium received for granting the put. In exchange for the premium
received for granting a put option on a futures contract, the option
grantor gives up all of the potential gain resulting from a decrease in
the price of the underlying futures contract below the option strike
price upon exercise or expiration of the option.
* * * * *
(5) * * *
Also, an option customer should be aware of the risk that the
futures price prevailing at the opening of the next trading day may be
substantially different from the futures price which prevailed when the
option was exercised.
* * * * *
Issued in Washington, DC, on April 18, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Commodity Options Final Rule and Interim Final Rule--
Commission Voting Summary and Statements of Commissioners
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix 1--Commission Voting Summary
On this matter, Chairman Gensler and Commissioners Sommers,
Chilton, O'Malia, and Wetjen voted in the affirmative; no
commissioner voted in the negative.
Appendix 2--Statement of Chairman Gary Gensler
I support the final rules on Commodity Options. The Dodd-Frank
Wall Street Reform and Consumer Protection Act includes commodity
options within the statutory definition of ``swap.'' The final rule
confirms that the same rules apply to commodity options as are
applicable to other swaps, just as the law directs. In addition, the
Commodity Futures Trading Commission will consider and seek comment
on an interim final rule to provide a trade option exemption for
certain commodity options that are physically delivered.
We received a lot of feedback from commercial market
participants that commodity options used by commercial entities to
deliver or receive physical commodities in connection with their
business don't need the same level of oversight as swaps. However,
trade options will still be subject to position limits, appropriate
reporting and recordkeeping requirements, and anti-fraud and anti-
manipulation rules. The Commission is seeking additional comments on
the trade option exemption, but the interim final rule makes the
relief immediate.
[FR Doc. 2012-9888 Filed 4-26-12; 8:45 am]
BILLING CODE P
Last Updated: April 27, 2012