2013-20617

Federal Register, Volume 78 Issue 164 (Friday, August 23, 2013)[Federal Register Volume 78, Number 164 (Friday, August 23, 2013)]

[Rules and Regulations]

[Pages 52426-52429]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2013-20617]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD64

Retail Commodity Transactions Under Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretation.

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SUMMARY: On December 14, 2011, the Commodity Futures Trading Commission

(``Commission'' or ``CFTC'') issued in the Federal Register an

interpretation (``Interpretation'') regarding the meaning of the term

``actual delivery,'' as set forth in the Commodity Exchange Act. The

Commission also requested public comment on whether the Interpretation

accurately construed the statutory language. In response to the

comments received, the Commission has determined to clarify its

Interpretation.

DATES: Effective August 23, 2013.

FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel,

Division of Enforcement, 312-596-0538, [email protected], or Martin

B. White, Assistant General Counsel, Office of the General Counsel,

202-418-5129, [email protected], Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

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

Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII

of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'')

\3\ to establish a comprehensive new regulatory framework for swaps and

security-based swaps. The legislation was enacted to reduce risk,

increase transparency, and promote market integrity within the

financial system by, among other things: (1) Providing for the

registration and comprehensive regulation of swap dealers and major

swap participants; (2) imposing clearing and trade execution

requirements on standardized derivative products; (3) creating robust

recordkeeping and real-time reporting regimes; and (4) enhancing the

Commission's rulemaking and enforcement authorities with respect to,

among others, all registered entities and intermediaries subject to the

Commission's oversight.

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\1\ See Dodd-Frank Wall Street Reform and Consumer Protection

Act of 2010, 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.

\2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may

be cited as the ``Wall Street Transparency and Accountability Act of

2010.''

\3\ 7 U.S.C. 1 et seq.

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In addition, section 742(a) of the Dodd-Frank Act amends section

2(c)(2) of the CEA to add a new subparagraph, section 2(c)(2)(D) of the

CEA,\4\ entitled ``Retail Commodity Transactions.'' New CEA section

2(c)(2)(D) broadly applies to any agreement, contract, or transaction

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

entered into with), a non-eligible contract participant or non-eligible

commercial entity on a leveraged or margined basis, or financed by the

offeror, the counterparty, or a person acting in concert with the

offeror or counterparty on a similar basis.\5\ New CEA section

2(c)(2)(D) further provides that such an agreement, contract, or

transaction shall be subject to CEA sections 4(a),\6\ 4(b),\7\ and 4b

\8\ as if the agreement, contract, or transaction was a contract of

sale of a commodity for future delivery.\9\

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\4\ 7 U.S.C. 2(c)(2)(D).

\5\ 7 U.S.C. 2(c)(2)(D)(i).

\6\ 7 U.S.C. 6(a) (prohibition against off-exchange contracts of

sale of a commodity for future delivery).

\7\ 7 U.S.C. 6(b) (regulation of foreign boards of trade with

United States participants).

\8\ 7 U.S.C. 6b (prohibition against fraud).

\9\ 7 U.S.C. 2(c)(2)(D)(iii).

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

application. In particular, new CEA section 2(c)(2)(D)(ii)(III)(aa)

\10\ excepts a contract of sale that results in actual delivery within

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

rule or regulation based upon the typical commercial practice in cash

or spot markets for the commodity involved.\11\

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\10\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).

\11\ The Commission has not adopted any regulations permitting a

longer actual delivery period for any commodity pursuant to new CEA

section 2(c)(2)(D)(ii)(III)(aa). Accordingly, the 28-day actual

delivery period set forth in this provision remains applicable to

all commodities.

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On December 14, 2011, the Commission issued an Interpretation

inviting public comment on whether its stated interpretation of the

term ``actual delivery,'' as used in new CEA section

2(c)(2)(D)(ii)(III)(aa), accurately construes the statutory

language.\12\ The Commission received several public comments on the

Interpretation. After thoroughly reviewing those comments, the

Commission has determined to clarify its Interpretation in response to

the comments received.

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\12\ Retail Commodity Transactions Under Commodity Exchange Act,

76 FR 77670 (Dec. 14, 2011).

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II. Summary of Comments

A. Comments Generally

The Commission received 13 comments in response to its

Interpretation.\13\ The comments included 11 comment letters that

addressed the Interpretation. These 11 comment letters were submitted

by entities representing a broad range of interests, including a self-

regulatory organization,\14\ precious metals dealers and depository

companies,\15\ law firms,\16\ trade associations comprised of energy

producers and suppliers,\17\ and electricity and natural gas

suppliers.\18\

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\13\ The comment file may be accessed at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1124.

\14\ National Futures Association (NFA).

\15\ Dillon Gage Group (DGG) and Monex Deposit Company and its

affiliate (MDC).

\16\ J.B. Grossman P.A. (JBG), Greenberg Traurig, LLP (GBT), and

Rothgerber Johnson & Lyons LLP (RJL).

\17\ National Energy Markets Association (NEM), Retail Energy

Supply Association (RESA), and Commercial Energy Working Group

(CEWG).

\18\ Constellation NewEnergy, Inc., Green Mountain Energy

Company, Direct Energy Services, LLC, Exelon Energy Company, Reliant

Energy Retail Holdings, LLC, Liberty Power Corporation, and Champion

Energy Services, LLC.

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Of the 11 comment letters addressing the Interpretation, two voiced

general support for the Interpretation. For example, NFA stated:

NFA fully supports the Commission's proposed interpretation of

the term [actual delivery] and believes that it is consistent with

the statutory language.

The comment letter submitted by DGG expressed its appreciation of

the Commission's efforts to ``curtail any fraudulent retail commodity

transactions occurring by unscrupulous actors.'' DGG further urged the

Commission to consider delivery of precious metals to affiliates of the

seller, but not to the seller itself, as constituting actual delivery

under new CEA section 2(c)(2)(D)(ii)(III)(aa), stating that ``[w]hile

we understand the CFTC's desire to ensure, among other things, that the

seller actually has the commodity to deliver, an affiliate of one of

the limited types of depositories described in Example 2 [of the

Interpretation] are unlikely to be the

[[Page 52427]]

seller `fraudsters' Senator Lincoln had in mind.''

Two of the comment letters submitted by law firms generally did not

support the Interpretation. GBT stated that neither the Dodd-Frank Act

nor its legislative history indicated Congress's desire to limit the

depositories to which actual delivery could be made, and JBG voiced its

view that delivery in the context of precious and industrial metals

requires only transfer of title to metal, not physical delivery of

metal.

The third comment letter submitted by a law firm, RJL, was

submitted on behalf of precious metals dealers. RJL requested

clarification of when the Commission will consider the 28 days in new

CEA section 2(c)(2)(D)(ii)(III)(aa) to begin and urged the Commission

to allow for delivery of precious metals to additional depositories

beyond those described in the Interpretation. RJL also requested

clarification, as did MDC, a retail precious metals dealer, of whether

the offset of a precious metals purchase prior to transfer of title to

the customer and delivery of the precious metals to a depository within

28 days would cause the original purchase to become a prohibited

transaction under new CEA section 2(c)(2)(D).

Finally, four of the comment letters were submitted by energy

suppliers or trade associations comprised of energy producers and

suppliers, and they generally requested clarification of whether new

CEA section 2(c)(2)(D) and/or its exceptions apply to the sale and

delivery of physical energy commodities, such as electricity and

natural gas, to industrial, commercial, and/or retail customers on a

recurring basis. For example, NEMA requested:

that the Commission clarify that the type of transactions which its

retail energy marketer members typically enter into with residential

and commercial customers, in which they contract with the customer

to provide physical energy supply (electricity or natural gas) for

terms that regularly in the course of business contemplate delivery

of the physical energy commodity in excess of 28 days, were not

intended and should not be interpreted to constitute `retail

commodity transactions' under the Act.

B. Specific Comments

1. Functional Approach and Relevant Factors

Significantly, no commenters criticized, expressed disagreement

with, or questioned the underlying foundation for the Commission's

approach in determining whether ``actual delivery'' has occurred, as

set forth in the Interpretation: ``The determination of whether `actual

delivery' has occurred within the meaning of new CEA section

2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding

delivery beyond the four corners of contract documents;'' and ``in

determining whether actual delivery has occurred within 28 days, the

Commission will employ a functional approach and examine how the

agreement, contract, or transaction is marketed, managed, and

performed, instead of relying solely on language used by the parties in

the agreement, contract, or transaction.'' \19\ Further, no comment

letters criticized, expressed disagreement with, or questioned the

relevant factors the Commission enumerated in the Interpretation:

Ownership, possession, title, and physical location of the commodity

purchased or sold, both before and after execution of the agreement,

contract, or transaction; the nature of the relationship between the

buyer, seller, and possessor of the commodity purchased or sold; and

the manner in which the purchase or sale is recorded and completed.\20\

Accordingly, the Commission will assess whether any given transaction

results in actual delivery within the meaning of new CEA section

2(c)(2)(D)(ii)(III)(aa) by employing the functional approach and

considering the factors set forth in the Interpretation.

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\19\ 76 FR 77670, 77672 (Dec. 14, 2011).

\20\ Id.

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2. When the 28-Day Period Begins

In response to the comment from RJL, the Commission is clarifying

when it will consider the 28-day period in new CEA section

2(c)(2)(D)(ii)(III)(aa) to begin. The Commission has determined that

the most practical point at which to begin counting the 28 days is the

date on which the agreement, contract, or transaction is entered into.

This approach is consistent with the functional approach the Commission

will take in determining whether actual delivery has occurred, and it

should provide industry participants and the public with a readily

ascertainable date for determining whether actual delivery has occurred

within the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa).

3. Interpretation Examples

The Interpretation included five examples to illustrate how the

Commission would determine whether actual delivery has occurred within

the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa), and several

comment letters urged the Commission to allow for delivery of

commodities to depositories beyond those described in Example 2 or

expressed disagreement with any limitation imposed on acceptable

depositories or the precise form of delivery. The Commission has

considered these comments and has determined to clarify the intent

behind these examples.

The examples are non-exclusive and are included to provide the

public with guidance on how the Commission will apply the relevant

factors enumerated in the Interpretation in making its determination of

whether actual delivery has occurred within the meaning of new CEA

section 2(c)(2)(D)(ii)(III)(aa). Examples 1 and 2 do not encompass all

scenarios in which the Commission may determine that actual delivery

has occurred, nor do Examples 3, 4, and 5 encompass all scenarios in

which the Commission may determine that actual delivery has not

occurred. Specifically, with regard to Example 2, the Commission may

determine that actual delivery has occurred if a commodity is delivered

to an affiliate of the seller or is already physically located at a

depository, so long as the commodity is otherwise delivered in

accordance with the methods described in Example 2, if a careful

consideration of the other relevant factors enumerated in the

Interpretation demonstrates that the purported delivery is not simply a

sham and that actual delivery has occurred within the meaning of new

CEA section 2(c)(2)(D)(ii)(III)(aa). Conversely, the Commission may

determine that actual delivery has not occurred if a commodity is

purportedly delivered to an affiliate of the seller, but the Commission

is unable to obtain sufficient assurances within a reasonable period of

time that the purported delivery is not simply a sham.

4. Offsetting of Transactions

Two commenters, in response to Example 5 of the Interpretation,

requested clarification of whether the offset of a precious metals

purchase prior to transfer of title to the customer and delivery of the

precious metals to a depository within 28 days would cause the original

purchase to become a prohibited transaction under new CEA section

2(c)(2)(D). After careful consideration of this comment, the Commission

has determined that Example 5 accurately illustrates the Commission's

views of whether actual delivery will have occurred under the

circumstances described in Example 5. However, the Commission

recognizes that a customer may request to cancel a purchase of a

commodity prior to actual delivery of the commodity within 28 days due

to extraordinary market

[[Page 52428]]

circumstances. Accordingly, the Commission will not prosecute a seller

for permitting such a cancellation, provided that the seller does so

only on limited occasions and at the customer's request, and further

provided that the customer does not enter into a subsequent transaction

within three business days of such cancellation.

5. Energy Producers and Suppliers

Four comment letters requested clarification of whether new CEA

section 2(c)(2)(D) and/or any of its exceptions apply to the sale and

delivery of physical energy commodities to industrial, commercial, and/

or retail customers on a recurring basis. Specifically, under the

scenario described in these comment letters, energy firms enter into

fixed price contracts with customers to supply electricity or natural

gas to the customer's residence or business for a period of one or more

years. The customer consumes the electricity or natural gas and

subsequently pays for that usage, along with all applicable taxes, on a

periodic basis. The Commission is not of the view that new CEA section

2(c)(2)(D) applies to this scenario, particularly in light of the fact

that the customer regularly receives delivery of and consumes the

physical energy commodity over the term of the contract and

periodically pays for that usage.

III. Commission Interpretation of ``Actual Delivery''

In consideration of the foregoing, the Commission issues the

following interpretation to inform the public of the Commission's views

as to the meaning of the term ``actual delivery'' as used in new CEA

section 2(c)(2)(D)(ii)(III)(aa) and to provide the public with guidance

on how the Commission intends to assess whether any given transaction

results in actual delivery within the meaning of the statute. This

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

2(c)(2)(D)(ii)(III)(bb) \21\ or any exception to new CEA section

2(c)(2)(D) other than new CEA section 2(c)(2)(D)(ii)(III)(aa).

Similarly, this interpretation does not address the meaning or scope of

contracts of sale of a commodity for future delivery, the forward

contract exclusion from the term ``future delivery'' set forth in CEA

section 1a(27),\22\ or the forward contract exclusion from the term

``swap'' set forth in CEA section 1a(47)(B)(ii).\23\ Nor does this

interpretation alter any statutory interpretation or statement of

Commission policy relating to the forward contract exclusion.\24\

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

\22\ 7 U.S.C. 1a(27).

\23\ 7 U.S.C. 1a(47)(B)(ii).

\24\ See, e.g., Statutory Interpretation Concerning Forward

Transactions, 55 FR 39188 (Sept. 25, 1990) (``Brent

Interpretation'').

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In the view of the Commission, the determination of whether

``actual delivery'' has occurred within the meaning of new CEA section

2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding

delivery beyond the four corners of contract documents. This

interpretation of the statutory language is based on Congress's use of

the word ``actual'' to modify ``delivery'' and on the legislative

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

Consistent with this interpretation of the statutory language, in

determining whether actual delivery has occurred within 28 days of the

date the agreement, contract, or transaction is entered into, the

Commission will employ a functional approach and examine how the

agreement, contract, or transaction is marketed, managed, and

performed, instead of relying solely on language used by the parties in

the agreement, contract, or transaction. This approach best

accomplishes Congress's intent when it enacted section 742(a) of the

Dodd-Frank Act and gives full meaning to Congress's term ``actual

delivery.''

Relevant factors in this determination include the following:

Ownership, possession, title, and physical location of the commodity

purchased or sold, both before and after execution of the agreement,

contract, or transaction, including all related documentation; the

nature of the relationship between the buyer, seller, and possessor of

the commodity purchased or sold; and the manner in which the purchase

or sale is recorded and completed. The Commission provides the

following non-exclusive examples to illustrate how it will determine

whether actual delivery has occurred within the meaning of new CEA

section 2(c)(2)(D)(ii)(III)(aa). The Commission may also determine that

actual delivery has occurred in circumstances beyond those described in

the first two examples if it can readily determine within a reasonable

period of time that the purported delivery is not simply a sham and

that actual delivery has occurred within 28 days within the meaning of

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

Example 1: Actual delivery will have occurred if, within 28

days, the seller has: (1) Physically delivered the entire quantity

of the commodity purchased by the buyer, including any portion of

the purchase made using leverage, margin, or financing, into the

possession of the buyer; and (2) has transferred title to that

quantity of the commodity to the buyer.

Example 2: Actual delivery will have occurred if, within 28

days, the seller has: (1) Physically delivered the entire quantity

of the commodity purchased by the buyer, including any portion of

the purchase made using leverage, margin, or financing, whether in

specifically segregated or fungible bulk form, into the possession

of a depository other than the seller and its parent company,

partners, agents, and other affiliates, that is: (a) A financial

institution as defined by the CEA; (b) a depository, the warrants or

warehouse receipts of which are recognized for delivery purposes for

any commodity on a contract market designated by the Commission; or

(c) a storage facility licensed or regulated by the United States or

any United States agency; and (2) has transferred title to that

quantity of the commodity to the buyer.\25\

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\25\ Based on Examples 1 and 2, an agreement, contract, or

transaction that results in ``physical delivery'' within the meaning

of section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code

would ordinarily result in ``actual delivery'' under new CEA section

2(c)(2)(D)(ii)(III)(aa), absent other evidence indicating that the

purported delivery is a sham. See Model State Commodity Code Sec.

1.04(a)(2)(i)-(iii), Comm. Fut. L. Rep. Archive (CCH) ] 22,568 (Apr.

5, 1985). Conversely, an agreement, contract, or transaction that

does not result in ``physical delivery'' within the meaning of

section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code is

highly unlikely to result in ``actual delivery'' under new CEA

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

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Example 3: Actual delivery will not have occurred if, within 28

days, a book entry is made by the seller purporting to show that

delivery of the commodity has been made to the buyer and/or that a

sale of a commodity has subsequently been covered or hedged by the

seller through a third party contract or account, but the seller has

not, in accordance with the methods described in Example 1 or 2,

physically delivered the entire quantity of the commodity purchased

by the buyer, including any portion of the purchase made using

leverage, margin, or financing, and transferred title to that

quantity of the commodity to the buyer, regardless of whether the

agreement, contract, or transaction between the buyer and seller

purports to create an enforceable obligation on the part of the

seller, or a parent company, partner, agent, or other affiliate of

the seller, to deliver the commodity to the buyer.

Example 4: Actual delivery will not have occurred if, within 28

days, the seller has purported to physically deliver the entire

quantity of the commodity purchased by the buyer, including any

portion of the purchase made using leverage, margin, or financing,

in accordance with the method described in Example 2, and transfer

title to that quantity of the commodity to the buyer, but the title

document fails to identify the specific financial institution,

depository, or storage facility with possession of the commodity,

the quality specifications of the commodity, the identity of the

party transferring title to

[[Page 52429]]

the commodity to the buyer, and the segregation or allocation status

of the commodity.

Example 5: Actual delivery will not have occurred if, within 28

days, an agreement, contract, or transaction for the purchase or

sale of a commodity is rolled, offset, or otherwise netted with

another transaction or settled in cash between the buyer and the

seller, but the seller has not, in accordance with the methods

described in Example 1 or 2, physically delivered the entire

quantity of the commodity purchased by the buyer, including any

portion of the purchase made using leverage, margin, or financing,

and transferred title to that quantity of the commodity to the

buyer, regardless of whether the agreement, contract, or transaction

between the buyer and seller purports to create an enforceable

obligation on the part of the seller, or a parent company, partner,

agent, or other affiliate of the seller, to deliver the commodity to

the buyer.

Issued in Washington, DC, on August 20, 2013, by the Commission.

Christopher J. Kirkpatrick,

Deputy Secretary of the Commission.

Appendix to Retail Commodity Transactions Under Commodity Exchange

Act--Commission Voting Summary

On this matter, Chairman Gensler and Commissioners Chilton,

O'Malia, and Wetjen voted in the affirmative. No Commissioners voted

in the negative.

[FR Doc. 2013-20617 Filed 8-22-13; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: August 23, 2013