Agricultural Commodity Definition, 41048-41056 [2011-17626]
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Federal Register / Vol. 76, No. 134 / Wednesday, July 13, 2011 / Rules and Regulations
proposed rulemaking, the opportunity
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effective date, are inapplicable because
this regulation involves a military or
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States. (See 5 U.S.C. 553(a)(1)). This
final rule implements the United States
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et seq., are not applicable. Therefore,
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the 30-day delay in effectiveness for the
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this regulation is made effective
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List of Subjects
4. Supplement No. 1 to Part 740—
Country Groups—is amended by adding
in alphabetical order ‘‘South Sudan,
Republic of’’ to ‘‘Country Group B’’.
■
Dated: July 6, 2011.
Kevin J. Wolf,
Assistant Secretary for Export
Administration.
[FR Doc. 2011–17607 Filed 7–8–11; 4:15 pm]
BILLING CODE 3510–33–P
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Part 1
RIN 3038–AD23
Commodity Futures Trading
Commission.
ACTION: Final rule.
15 CFR Part 740
Administrative practice and
procedure, Exports, Reporting and
recordkeeping requirements.
Accordingly, parts 738 and 740 of the
EAR (15 CFR parts 730–774) are
amended as follows:
PART 738—[AMENDED]
1. The authority citation for 15 CFR
Part 738 continues to read as follows:
■
Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 10 U.S.C. 7420; 10 U.S.C.
7430(e); 22 U.S.C. 287c; 22 U.S.C. 3201 et
seq.; 22 U.S.C. 6004; 30 U.S.C. 185(s), 185(u);
42 U.S.C. 2139a; 42 U.S.C. 6212; 43 U.S.C.
1354; 15 U.S.C. 1824a; 50 U.S.C. app. 5; 22
U.S.C. 7201 et seq.; 22 U.S.C. 7210; E.O.
13026, 61 FR 58767, 3 CFR, 1996 Comp., p.
228; E.O. 13222, 66 FR 44025, 3 CFR, 2001
Comp., p. 783; Notice of August 12, 2010, 75
FR 50681 (August 16, 2010).
Supplement No. 1 to Part 738—
[Amended]
2. Supplement No. 1 to part 738—
Commerce Country Chart—is amended
■ a. By adding in alphabetical order the
‘‘Country’’ ‘‘South Sudan, Republic of’’;
and
■ b. By adding for ‘‘South Sudan,
Republic of’’ an ‘‘X’’ in columns ‘‘CB1’’,
‘‘CB2’’, ‘‘NP1’’, ‘‘NS1’’, ‘‘NS2’’, ‘‘MT1’’,
‘‘RS1’’, ‘‘RS2’’, ‘‘CC1’’ and ‘‘CC3’’.
■
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Authority: 50 U.S.C. app. 2401 et seq.; 50
U.S.C. 1701 et seq.; 22 U.S.C. 7201 et seq.;
E.O. 13026, 61 FR 58767, 3 CFR, 1996 Comp.,
p. 228; E.O. 13222, 66 FR 44025, 3 CFR, 2001
Comp., p. 783; Notice of August 12, 2010, 75
FR 50681 (August 16, 2010).
AGENCY:
Exports.
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3. The authority citation for 15 CFR
Part 740 continues to read as follows:
■
Agricultural Commodity Definition
15 CFR Part 738
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PART 740—[AMENDED]
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The Commodity Futures
Trading Commission (‘‘Commission’’ or
‘‘CFTC’’) is charged with proposing
rules to implement new statutory
provisions enacted by Title VII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act (‘‘Dodd-Frank
Act’’). The Dodd-Frank Act, which
amends the Commodity Exchange Act
(‘‘CEA’’ or ‘‘Act’’), includes provisions
applicable to ‘‘a swap in an agricultural
commodity (as defined by the [CFTC]).’’
Neither Congress nor the CFTC has
previously defined that term for
purposes of the CEA or CFTC
regulations. On October 26, 2010, the
Commission requested comment on a
proposed definition. After reviewing the
comments submitted in response to the
proposed definition, the Commission
has determined to issue these final rules
in essentially the same form as
originally proposed, subject to a minor
revision to the commodity-based index
provision.
DATES: Effective Date—September 12,
2011.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Donald Heitman, Senior Special
Counsel, (202) 418–5041,
dheitman@cftc.gov, or Ryne Miller,
Attorney Advisor, (202) 418–5921,
rmiller@cftc.gov, Division of Market
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Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
SUPPLEMENTARY INFORMATION:
Part I—Background
On July 21, 2010, President Obama
signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act.1
Title VII of the Dodd-Frank Act 2
amended the 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.
The Dodd-Frank Act includes
provisions applicable to ‘‘a swap in an
agricultural commodity (as defined by
the [CFTC]).’’ Neither Congress nor the
CFTC has previously defined
‘‘agricultural commodity’’ for purposes
of the CEA or CFTC regulations. On
October 26, 2010, the Commission
issued a notice of proposed rulemaking
requesting comment on a proposed
definition of agricultural commodity
(the ‘‘NPRM’’).4 After reviewing the
comments submitted in response to the
proposed definition,5 the Commission
has determined to issue this final
definition in essentially the same form
as originally proposed, subject to a
minor revision to the commodity-based
index provision, for purposes of the
CEA and Commission regulations.
1 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 https://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.
4 75 FR 65586, Oct. 26, 2010.
5 Those comments are available on the
Commission’s Web site at: https://
comments.cftc.gov/PublicComments/
CommentList.aspx?id=868.
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A. Statutory Framework—‘‘Agricultural
Commodity’’
1. Pre Dodd-Frank Act
For a detailed discussion of the pre
Dodd-Frank statutory history relating to
the term agricultural commodity, please
review the NPRM at 75 FR 65586–
65587.
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2. The Dodd-Frank Act
In addition to deleting two existing
CEA provisions that referenced
agricultural commodities,6 the DoddFrank Act contains several new
provisions relating to agricultural
commodities. Section 721(a)(21) of the
Dodd-Frank Act adds a new section
1a(47) to the CEA defining the term
‘‘swap.’’ As part of the definition, clause
(iii) of section 1a(47)(A) provides that a
swap includes ‘‘any agreement, contract,
or transaction commonly known as
* * * an agricultural swap. * * *’’ 7
Section 723(c)(3)(A) of the DoddFrank Act, which is a free-standing
provision that does not amend the CEA,
contains a general rule whereby, except
as provided in section 723(c)(3)(B), ‘‘no
person shall offer to enter into, enter
into, or confirm the execution of, any
swap in an agricultural commodity (as
defined by the [CFTC]).’’ Section
723(c)(3)(B) provides that a swap in an
agricultural commodity may be
permitted pursuant to the Commission’s
exemptive authority under CEA section
4(c), ‘‘or any rule, regulation, or order
issued thereunder (including any rule,
regulation, or order in effect as of the
date of enactment of this Act) by the
[CFTC] to allow swaps under such terms
and conditions as the Commission shall
prescribe.’’
Section 733 of the Dodd-Frank Act
adds a new section 5h to the CEA that
governs the registration and regulation
of swap execution facilities. New CEA
section 5h(b)(2) provides that a swap
execution facility ‘‘may not list for
trading or confirm the execution of any
swap in an agricultural commodity (as
defined by the Commission) except
pursuant to a rule or regulation of the
Commission allowing the swap under
such terms and conditions as the
Commission shall prescribe.’’
Section 737 of the Dodd-Frank Act
amends CEA section 4a and specifically
directs the Commission to adopt
position limits for futures, DCM-traded
options, and swaps that are
economically equivalent to futures and
exchange-traded options for physical
6 Pre Dodd Frank CEA sections 2(g) and
5a(b)(2)(F).
7 See new CEA section 1a(47)(A)(iii)(XX) as added
by section 721(a)(21) of the Dodd-Frank Act.
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commodities other than excluded
commodities—that is, exempt and
agricultural commodities. Section 737
also sets timeframes for the adoption of
such position limits for both exempt
and agricultural commodities.
B. Regulatory Framework—
‘‘Agricultural Commodity’’
For a detailed discussion of the
history surrounding the Commission’s
regulatory framework related to the term
agricultural commodity, please review
the NPRM at 75 FR 65588–65589. Under
current regulations, the term
agricultural commodity is significant
primarily for parts 32 and 35.8 The final
definition is not anticipated to have any
significant substantive impact outside of
those rules.
In relation to parts 32 (dealing with
commodity options) and 35 (dealing
with swaps), the Commission, in a
separate proposed rulemaking, has
proposed (1) to treat all commodity
options that fall within the Dodd-Frank
definition of swap (including options on
either agricultural or non-agricultural
commodities) the same as any other
swap, thereby doing away with the need
to distinguish between an agricultural
commodity and any other type of
commodity for the purpose of
identifying the applicable options rules,
and (2) to treat swaps in an agricultural
commodity the same as any other swap,
thereby doing away with the need to
distinguish between an agricultural
commodity and any other type of
commodity for the purpose of
identifying the applicable swaps rules.9
The definition will also inform the
Commission’s planned rulemaking
addressing speculative position limits
on both agricultural and exempt
commodities.10
CFR part 32 and 17 CFR part 35.
proposal to treat agricultural swaps the
same as swaps in other commodities was issued
following an advance notice of proposed
rulemaking (‘‘ANPRM’’) that specifically asked
whether swaps in an agricultural commodity
should be treated any differently than other swaps.
See 75 FR 59666, Sept. 28, 2010. The overwhelming
majority of the comments supported adopting a rule
that would treat swaps in an agricultural
commodity the same as all other swaps, and the
proposed agricultural swaps rules that followed the
ANPRM so provide. (See: Commodity Options and
Agricultural Swaps, 76 FR 6095, February 3, 2011).
If the final agricultural swaps rules should reverse
course and prohibit or limit agricultural swaps, the
Commission will take appropriate action to address
any impact such rule change might have with
respect to the definition set out herein.
10 See § 737(a) of the Dodd-Frank Act; see also
Position Limits for Derivatives, 76 FR 4752, Jan. 26,
2011.
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Part II—Summary of Comments;
Commission Response to Comments
As noted above, on October 26, 2010
the Commission published for comment
a notice of proposed rulemaking that
proposed a definition of ‘‘agricultural
commodity’’ for purposes of the
Commodity Exchange Act and
Commission regulations.11 The NPRM
proposed a four category definition,
including:
1. The enumerated commodities listed
in section 1a of the CEA, including such
things as wheat, cotton, corn, the
soybean complex, livestock, etc.;
2. A general operational definition
that covers: ‘‘All other commodities that
are, or once were, or are derived from,
living organisms, including plant,
animal and aquatic life, which are
generally fungible, within their
respective classes, and are used
primarily for human food, shelter,
animal feed, or natural fiber;’’
3. A catch-all category for
commodities that would generally be
recognized as agricultural in nature, but
which do not fit within the general
operational definition. In addition to the
specified commodities named in
category three (tobacco and the products
of horticulture), category three would
also include other commodities that, in
future, would be classified as
‘‘agricultural commodities’’ as a result
of Commission action: ‘‘Tobacco,
products of horticulture, and such other
commodities used or consumed by
animals or humans as the Commission
may by rule, regulation, or order
designate after notice and opportunity
for hearing;’’ and
4. Finally, a provision applicable to:
‘‘Commodity-based contracts based
wholly or principally on a single
underlying agricultural commodity.’’
In response to the NPRM, the
Commission received twelve formal
comment letters 12 representing a broad
range of interests, including producers,
merchants, swap dealers, commodity
funds, futures industry organizations,
academics, and policy organizations. In
particular, comment letters were
received from the following persons or
entities: The Agricultural Swaps
Working Group (‘‘Ag Swaps Working
Group’’), comprised of financial
institutions that provide risk
management and investment products
11 75
FR 65586, Oct. 26, 2010.
comment file also includes records of
discussions with three external parties (Land
O’Lakes, Inc., a mixed group of agricultural and
academic interests, and an agricultural risk manager
from Kansas). At those meetings and/or phone calls,
issues tangential to the agricultural commodity
definition rulemaking were discussed between
visitors and Commission representatives.
12 The
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to agricultural end users; BOK Financial
(‘‘BOK’’); Better Markets, Inc. (‘‘Better
Markets’’); Commodity Markets Council
(‘‘CMC’’); Dairy Farmers of America,
Inc. (‘‘DFA’’); the Gavilon Group, LLC
(‘‘Gavilon’’); Institute for Agriculture
and Trade Policy (‘‘IATP’’); CME Group,
Inc. (‘‘CME Group’’); Minneapolis Grain
Exchange (‘‘MGEX’’); National Council
of Farmer Cooperatives (‘‘NCFC’’);
National Grain and Feed Association
(‘‘NGFA’’); and Michael Greenberger
(‘‘Professor Greenberger’’), a professor
from the University of Maryland Law
School. In addition, on May 4, 2011, the
Commission re-opened the comment
period on several of the Dodd-Frank
rulemakings, including the proposed
agricultural commodity definition, to
June 3, 2011.13 Of the additional
comments received, three specifically
addressed substantive concerns related
to the proposed agricultural commodity
definition—one letter from Chris
Barnard, discussed below; one letter
from the National Milk Producers
Federation (‘‘NMPF’’), generally
supporting the proposed definition; and
one letter from MGEX, reiterating the
arguments made in its earlier
comments.14
With minor variations discussed
below, the majority of commenters
supported the definition of agricultural
commodity as proposed. The following
statement from the NGFA is
representative:
The NGFA is supportive of the
Commission’s efforts to define the term
‘‘agricultural commodity’’ for purposes of
implementing provisions of the Dodd-Frank
Wall Street Reform and Consumer Protection
Act. Generally, we believe the proposed rule
takes a straightforward and common-sense
approach to the issue and we have no current
objection to the categorization of various
agricultural commodities as detailed in the
proposed rule.
In response to the Commission’s questions,
the NGFA at this time is not aware of
additional commodities that should be
included in the definition, though they may
not fit neatly into the proposed rule; nor are
we aware of commodities that do fit the
13 See
76 FR 25274, May 4, 2011.
by the following quote from the
NMPF letter, the majority of the comments filed for
the June 3, 2011 deadline addressed issues outside
of the scope of the agricultural commodity
definition; e.g. end user concerns, cooperative
associations, and the general regulatory regime for
swaps:
NMPF agrees that the proposed rule provides a
reasonable definition of ‘‘agricultural commodity’’,
with respect to milk, dairy products, and common
dairy feedstuffs.
However, this agreement must be seen in the
context of our concerns about the potential overregulation of farmers, farmer cooperative
associations, and other commercial end users,
including small and limited resource farmers.
See letter from NMPF.
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proposed definition but should not be
included. However, to accommodate
situations that could arise in the future as
new products are developed, the NGFA
agrees that it would be prudent for the
Commission to maintain some flexibility to
consider or reconsider the status of any
particular commodity as questions may arise
in the context of specific markets or
transactions.15
Many of the commenters specifically
supported the fact that the proposed
definition excludes biofuels.16 In
addition, several commenters further
noted the appropriateness of the
definition in a regulatory regime where
the Commission may decide to treat
agricultural swaps as it does all other
swaps.17
General support for the proposed
definition; request for clarification on
category two. Several commenters
offered their general support for the
definition as proposed, requesting only
that the Commission clarify in any final
rule that the second category of the
agricultural commodity definition is
self-effectuating and will encompass
commodities that are now, or in the
future may be, subject to swaps, futures,
and options trading, without the need
for additional CFTC action.18 These
commenters suggested that such
clarification would be consistent with
Congress’ definition of ‘‘commodity’’ in
the CEA, which includes certain
enumerated commodities and ‘‘all other
goods and articles, * * * and all
services, rights, and interests in which
contracts for future delivery are
presently or in the future dealt in.’’ 19
In response to this request, the
Commission wishes to clarify that the
general operational definition found in
the second category is self-executing
and will encompass commodities that
are now, or in the future may become
subject to swaps, futures, and options
trading, without the need for additional
CFTC action. In this regard, the rule
defines those commodities that are
agricultural commodities. It does not
matter whether futures, swaps, or
options are being traded in the
commodity—either now or in the future.
Request for consideration of public
comment regarding the classification of
new commodities. Other commenters
asked that the Commission provide a
means for the public to comment upon
letter from NGFA.
e.g., letters from Gavilon, IATP, and the Ag
Swaps Working Group.
17 In fact, the Commission has recently proposed
to treat agricultural swaps the same as any other
swap: See Commodity Options and Agricultural
Swaps, 75 FR 6095, Feb. 3, 2011.
18 See, e.g., letters from CME Group, the Ag Swap
Working Group, Gavilon, and DFA.
19 See CEA section 1a(4).
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15 See
16 See,
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and appeal any Commission decision to
include or exclude a particular
commodity from the list of agricultural
commodities under any category of the
definition. As proposed, such a
comment and appeal process is
contemplated only for commodities that
may fall under category three of the
Commission’s definition. In particular,
subparagraph three of the agricultural
commodity definition would allow the
Commission to designate any other
commodity used or consumed by
animals or humans to be an agricultural
commodity ‘‘by rule, regulation or order
* * * after notice and opportunity for
hearing.’’ 20 CMC asked for a
clarification or expansion of this
process:
We therefore urge the Commission to
provide for an appeals process for new
instruments. To elaborate, we request that a
consistent process and time period be
instated for appealing a CFTC decision to
include or exclude a particular commodity
from the list of agricultural commodities. We
acknowledge that the CFTC in its [NPRM]
has made a provision for public hearings for
Category 3 agricultural commodities, but we
request that a process for public comments
and appeals be made broadly available in the
context of including or excluding an
agricultural commodity under any category
of the definition.21
On this topic, NGFA commented that in
order to accommodate situations that
could arise in the future as new
products are developed, it would be
prudent for the Commission to maintain
some flexibility to consider or
reconsider the status of any particular
commodity as questions may arise in
the context of specific markets or
transactions.
In considering these comments, the
Commission has determined that the
proposed definition, in conjunction
with the Commission’s existing rules,
already accommodates any concerns
raised. With respect to commodities
already listed in categories one or two,
the NPRM that preceded these final
rules provided an opportunity to
question or challenge the inclusion or
exclusion of any commodity listed in
those categories. With respect to
commodities not covered by the first
two categories, category three of the
proposed definition permits the
Commission to designate any particular
commodity as an ‘‘agricultural
commodity,’’ but only after notice and
an opportunity for hearing. Therefore,
any time the Commission wishes to
designate a particular commodity as an
‘‘agricultural commodity,’’ it must
20 See NPRM at 75 FR 65586 at 65593, Oct. 26,
2010.
21 See letter from CMC.
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follow the procedures attendant to a
normal notice and comment rulemaking
(i.e., issuing a notice of proposed
rulemaking, allowing a comment period,
and then issuing a final rule or order).
In addition, any action by the
Commission to remove a commodity
from the definition would constitute a
regulatory amendment that would
similarly require a notice and comment
rulemaking.
To the extent interested parties want
to request that the Commission amend
or add to the definition on their own
initiative, they may submit a petition for
issuance, amendment, or repeal of any
rule pursuant to Commission regulation
13.2.
New or innovative commodity
products. While generally supportive of
the proposed definition, a comment
letter from IATP expressed concern with
respect to the commercial
commodification of currently
experimental commodities, ‘‘It perhaps
goes without saying that the
modification of traditional commodities
by synthetic biology and other
nanotechnologies will pose many and
complex regulatory challenges to protect
the public interest, should these
commodities be traded under contracts
subject to CFTC rules.’’22
The Commission believes that
categories two and three of the
definition, as proposed, appropriately
provide for the inclusion of new or
innovative commodities within the
definition of ‘‘agricultural
commodity’’—should such a
determination become necessary.23
These ‘‘new’’ commodities will likely
fall under category two of the
agricultural commodity definition as
being ‘‘used primarily for human food,
shelter, animal feed or natural fiber.’’
And if they do not fall under category
two, the Commission may use category
three to issue a rule or order labeling
them as agricultural commodities.
Commodity-based indexes. Several
commenters focused on subparagraph
four of the proposed definition, which
would include ‘‘commodity-based
contracts based wholly or principally on
a single underlying agricultural
commodity.’’ 24 MGEX commented that
subparagraph four should be withdrawn
altogether, arguing that cash-settled and
electronically traded contracts on
indexes (such as contracts on MGEX’s
22 See
letter from IATP.
this context, the Commission believes that
the definition is appropriately flexible to
incorporate food substitutes and other similar
products should there be a need to do so at some
point in the future.
24 See NPRM at 75 FR 65586 at 65593, Oct. 26,
2010.
23 In
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various wheat, corn, and soybean cashbid indexes) should remain outside of
the definition of agricultural
commodity.25
The NCFC commented that, without
information on the practical effects of
using a larger or smaller threshold than
the proposed ‘‘more than 50%’’ to
define ‘‘principally,’’ it supports the
more than 50% level of a single
commodity as proposed. However, they
suggested future review of that level if
concerns are raised or potential issues
need to be addressed.26
Two commenters, Professor
Greenberger and Better Markets,
objected to the fact that the ‘‘based
wholly or principally on a single
underlying agricultural commodity’’
approach used in the proposed
definition would fail to include indexes
that contained several different
agricultural commodities but had no
concentration of greater than 50% of
any one commodity. Professor
Greenberger argued that, ‘‘The
Commission should include a contract
based on an index that includes
agricultural commodities within the
definition of agricultural commodity, so
that it may be subject, inter alia, to the
later rulemakings on speculative
position limits under [section] 737 of
the Dodd-Frank Act.’’ Better Markets
expressed the concern that the proposed
definition could enable a person to
avoid compliance with other regulatory
provisions specific to agricultural
commodities, such as speculative
position limits. As a potential solution,
Better Markets proposed a revision to
subparagraph four that would evaluate
commodity-based indexes on a pro-rata
basis, with no minimum or maximum
percentage criterion. Under the Better
Markets proposal, any contract on a
commodity-based index could be both
(1) a contract on agricultural
commodities for that percentage of the
index that is based on any agricultural
commodity, and (2) a contract on nonagricultural commodities for that
percentage of the index that is based on
any non-agricultural commodity.27
25 As will be discussed further below, MGEX’s
comment may be based in part on confusion in the
Commission’s wording of subparagraph four. As
proposed, subparagraph four applies to
‘‘commodity-based contracts’’ when in fact the
wording should have read ‘‘commodity-based
indexes,’’ and has been so corrected in the final
rule.
26 See letter from NCFC.
27 Better Markets proposed that subparagraph four
read as follows: ‘‘Commodity-based contracts based
on a single underlying agricultural commodity;
provided that contracts based on composite prices
in the form of an index, which composite prices
include one or more agricultural commodities, shall
be considered to be one or more commodity-based
contracts pro-rata based on the relevant weighting
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Thus, for example, a person holding a
contract on an index that is equally
weighted in corn and soybeans would
be considered to have a position in both
corn and soybeans and this position
would be aggregated with other corn
and/or soybeans positions held by that
trader for purposes of complying with
speculative position limits applicable to
either commodity.
Chris Barnard’s letter similarly
suggested that the Commission should
revise category four to apply to
‘‘commodity-based [indexes] based
wholly or principally on underlying
agricultural commodities.’’
In considering these comments, the
Commission has determined to refine
category four as follows:
(a) In the final rule, the Commission
has removed references to contracts and
added references to indexes, confirming
that category four applies to commoditybased indexes, rather than commoditybased contracts on an index.
(b) In addition to the revisions
described in (a), the text of category four
has been revised to include commoditybased indexes ‘‘based wholly or
principally on underlying agricultural
commodities’’—as opposed to ‘‘based
wholly or principally on a single
underlying agricultural commodity.’’ As
a general matter, the Dodd-Frank Act
gives the Commission the authority to
prohibit or otherwise limit swaps in an
agricultural commodity. In the event
that the Commission did take steps to
generally prohibit or otherwise limit
swaps in an agricultural commodity,
there would be legitimate concern about
the potential proliferation of
‘‘agricultural commodity-based
indexes’’ (and contracts thereon) being
designed to replicate the economic
terms of otherwise prohibited swaps in
an agricultural commodity.
However, because the Commission
has proposed to permit swaps in an
agricultural commodity to transact
subject to the same rules applicable to
all other swaps, that concern is almost
certainly moot.28 There will be no
incentive for regulatory arbitrage as
between an agricultural swap and a
swap on an index that is economically
equivalent to an agricultural swap
because both transactions would be
subject to the same regulatory scheme.
Nonetheless, in response to certain
concerns raised by Professor
Greenberger, Better Markets, and Mr.
Barnard, the Commission is expanding
the commodity-based index category of
the agricultural commodity definition to
of each such single agricultural commodity in the
index.’’
28 See footnote 9, above.
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include not only any index that is
concentrated at greater than 50% in a
single agricultural commodity, but also
any index concentrated at greater than
50% in agricultural commodities
generally. Thus, for example, an index
composed of 25% each, wheat, corn,
soybeans, and gold would fall within
the definition because more than 50% of
that index is composed of agricultural
commodities, and any contract on that
index would be a contract on an
agricultural commodity.
(c) As described above, the Better
Markets comment letter also raised a
related concern about the potential for
avoiding position limits by using swaps
on an index as an alternative to swaps
on an agricultural commodity. Professor
Greenberger expanded the concern,
arguing that any multiple commodity
index that references any farm product
should be included in the definition of
agricultural commodity. The
Commission has considered these
comments and notes the following:
(1) As proposed,29 position limits
would be applied on a contract by
contract basis. That is, the inquiry into
whether an index is an ‘‘agricultural
commodity’’ is not relevant, because
there are no position limits that would
apply broadly to a contract on an
‘‘agricultural commodity.’’ Rather, the
proposed position limits apply to
positions in specific contracts, known as
reference contracts (for example, the
CBOT corn contract, the CBOT wheat
contract, etc.), options thereon, and
swaps economically equivalent thereto.
The relevant inquiry becomes whether a
contract on an index (or pro rata portion
thereof) is economically equivalent to a
reference contract, as defined in the
proposed position limit rules, and not
whether an index is or is not an
agricultural commodity.
(2) The position limit rules directly
address contracts on a commodity-based
index that would be used in an attempt
to circumvent the position limit rules.
Specifically, the proposed position limit
rules provide that ‘‘a commodity index
contract that incorporates the price of a
commodity underlying a referenced
contract’s commodity, which is used to
circumvent speculative position limits,
shall be considered to be a referenced
contract for the purpose of applying the
[proposed position limit rules].’’ 30
(d) As indicated above, MGEX favored
withdrawing category four altogether,
arguing that cash-settled and
electronically traded contracts on
indexes (such as contracts on MGEX’s
29 See Position Limits for Derivatives, 76 FR 4752,
Jan. 26, 2011.
30 Ibid.
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various wheat, corn, and soybean cashbid indexes) should remain outside of
the definition of agricultural
commodity. In response, the
Commission initially notes that DoddFrank directs the Commission to adopt
a definition of agricultural commodity.
Pursuant to section 723(c)(3) of the
Dodd-Frank Act, swaps in an
agricultural commodity (as defined by
the Commission) are prohibited unless
permitted by a CEA section 4(c)
exemption. However, because the
agricultural swaps proposal 31 will, if
adopted as proposed, permit
agricultural swaps to transact subject to
the same rules applicable to any other
swap, it appears that the practical effect
of being labeled an agricultural
commodity (or avoiding the label of
agricultural commodity) will be
immaterial.
Still, the Commission will retain the
authority, pursuant to section 723(c)(3)
of the Dodd-Frank Act, to revise or
amend the agricultural swaps rules and
to place further limitations or
restrictions on swaps in an agricultural
commodity in the future.32 For that
reason, the Commission is taking the
step now, via the agricultural
commodity definition, to remove any
incentive for regulatory gaming that
could result from being able to avoid the
label of agricultural commodity by, for
example, creating indexes, and then
executing contracts thereon, that act as
the functional or economic equivalent of
otherwise limited or prohibited swaps
on an agricultural commodity.
Accordingly, the Commission is
retaining the commodity-based index
component in its agricultural
commodity definition, as revised herein.
Customer hedging. BOK submitted a
comment letter requesting an exemption
from section 723(c)(3)(A) of the DoddFrank Act 33 for transactions that hedge
customer positions, irrespective of
whether the underlying commodity is
agricultural or non-agricultural. That is,
BOK’s letter requests that the
Commission provide a confirmation that
FR 6095, Feb. 3, 2011.
that the authority under section 723(c)(3)
only applies to swaps in an agricultural commodity
and does not extend to futures on an agricultural
commodity.
33 Swaps in an agricultural commodity, other than
those currently permitted (for example, pursuant to
part 35), are generally prohibited under section
723(c)(3)(A) of the Dodd-Frank Act, which is the
provision cited by BOK. However, section
723(c)(3)(B) provides that the Commission, using its
CEA section 4(c) authority, may expand the
universe of agricultural swaps that are permitted to
trade. The Commission’s recent agricultural swaps
and commodity options proposal would permit
agricultural swaps transactions to continue subject
to all rules otherwise applicable to any other swap.
See 75 FR 6095, Feb. 3, 2011.
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32 Note
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hedging transactions involving
agricultural commodities will not be
subject to the Dodd-Frank Act’s general
prohibition of swaps in an agricultural
commodity. The Commission believes
that the concerns raised by BOK’s letter
have generally been addressed in the
Commission’s proposed rules for
agricultural swaps and commodity
options. Those rules would treat
agricultural swaps, whether they
constitute hedging or speculation, the
same as other swaps. Thus, hedging
transactions involving agricultural
swaps would be subject to the same
standards as hedging transactions
involving other commodities.34
Category two determinations. MGEX
also commented briefly on the
Commission’s explanatory example in
the NPRM regarding the phrase ‘‘used
primarily’’ in category two. Category
two covers: ‘‘All other commodities that
are, or once were, or are derived from,
living organisms, including plant,
animal and aquatic life, which are
generally fungible, within their
respective classes, and are used
primarily for human food, shelter,
animal feed, or natural fiber.’’ The
NPRM explained that the phrase ‘‘used
primarily’’ means that if ‘‘50% of the
peaches harvested, plus one, are used
for human food’’ then peaches are an
agricultural commodity. MGEX
commented that this definition could
lead to a slippery slope of managing the
use for each crop and that the definition
did not appear to provide for legal
certainty.
The Commission has considered
MGEX’s comment and determined to
retain category two as proposed,
including the above-quoted explanation
of the phrase ‘‘used primarily.’’ Initially,
and as noted above, the difference
between being labeled an agricultural
commodity and any other type of
commodity is likely to have minimal or
no impact because: (1) The Commission
has proposed rules to treat agricultural
swaps the same as any other swap; and
(2) the position limit rules proposed by
the Commission would apply on a
contract-by-contract basis and do not
key on whether or not a particular
commodity is agricultural.
Beyond that, the Commission is not
aware of, and MGEX did not identify,
any actual commodity where the
‘‘amount used for human food, shelter,
animal feed, or natural fiber’’ is so close
to 50% as to present a danger of being
gamed for the purpose of avoiding the
application of the agricultural
commodity definition. The point of the
34 See Commodity Options and Agricultural
Swaps, 76 FR 6095, Feb. 3, 2011.
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Commission’s proposed definition and
accompanying explanation was to draw
a reasonable and common sense line
between that which is agricultural and
that which is not. To the extent the
prospect of gaming this aspect of
category two of the agricultural
commodity definition arises in the
future, the Commission also points out
that it may use category three of the
definition to declare any particular
commodity to be agricultural by issuing
a rule, regulation, or order so
designating ‘‘after notice and
opportunity for hearing.’’
Effective date. The final question
facing the Commission was: ‘‘What
should be the effective date of the final
definition?’’ 35 CME Group noted that
‘‘[o]nce adopted, the definition will also
clarify the scope of the exemptions
under CEA sections 2(g) and 2(h)—at
least until Dodd-Frank takes effect and
eliminates these exemptions.’’ However,
any clarification needed as between the
agricultural commodity definition and
pre Dodd-Frank CEA provisions is being
addressed in the Commission’s DoddFrank transition period relief.36 Beyond
concerns related to pre Dodd-Frank CEA
provisions, NCFC noted that it was
‘‘unaware of any reason not to make the
definition of agricultural commodity
effective upon the publication of the
final rule.’’
Therefore, the Commission has
determined that the effective date of the
final agricultural commodity definition
shall be sixty days after the publication
of this final rule, as required by the
Dodd-Frank Act. By providing that the
definition becomes effective as early as
is allowed by the Dodd-Frank Act, the
Commission intends to provide legal
certainty for market participants as they
plan for the regulatory regime that will
follow the Dodd-Frank transition relief.
35 The NPRM specifically noted:
[I]f the definition of an agricultural commodity is
made effective upon the publication of a final rule,
it would provide clarity as to what swaps are or are
not eligible for the exemptions found in current
CEA [sections] 2(g) and 2(h) until the point at
which their repeal by the Dodd-Frank Act becomes
effective. Is there any reason not to make the
definition of agricultural commodity effective upon
the publication of a final rule? Are there swaps
currently being transacted under [section] 2(g) or
[section] 2(h) that would be considered transactions
in an agricultural commodity (and thus potentially,
temporarily illegal) under the definition proposed
herein? If so, should the effective date of the
definition be postponed until the repeal of current
CEA [sections] 2(g) and 2(h), for all purposes other
than for the setting of speculative position limits,
which will become effective prior to the repeal?
See NPRM at 65592.
36 See Effective Date for Swap Regulation, 76 FR
35372, June 17, 2011.
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Part III—Explanation of the Definition
A. Terms of the Final Definition
Except for the revisions to category
four (explained more fully below), the
terms of the final definition are the same
as the terms of the definition as
proposed in the NPRM.
B. Explaining the Definition
Category One—Enumerated Agricultural
Commodities
Category one includes the
‘‘enumerated agricultural commodities’’
specified in current section 1a(4) of the
Act (renumbered as section 1a(9) under
the Dodd-Frank Act). While there is
considerable overlap between categories
one and two, category one includes
some commodities that would not
qualify under category two. For
example, ‘‘fats and oils’’ would include
plant-based oils, such as tung oil and
linseed oil, which are used solely for
industrial purposes (and thus would not
fall within category two). Section 1a(4)’s
reference to ‘‘oils’’ would not, however,
extend to petroleum products.37
Category Two: Operative Definition of
Agricultural Commodities
As a general matter, Category 2 seeks
to draw a line between products derived
from living organisms that are used for
human food, shelter, animal feed or
natural fiber (covered by the definition)
and products that are produced through
processing plant or animal-based inputs
to create products largely used as
industrial inputs (outside the
definition). This general operational
definition is self-executing and will
encompass commodities that are now or
in the future may become subject to
swaps, futures, and options trading,
without the need for additional CFTC
action. In this regard, the rule defines
those commodities that are agricultural
commodities. It does not matter whether
futures, swaps, or options are being
traded in the commodity—either now or
in the future. Thus, a commodity
evaluated under category two either is
or is not an agricultural commodity
regardless of its trading status.
Some of the terms used in describing
the second category require further
37 Petroleum products clearly would not fall
within the enumerated commodities. ‘‘These
itemized commodities are agricultural in nature.’’
Philip McBride Johnson, Commodities Regulation,
§ 1.01, p. 3 (1982). The Commission has never even
considered treating petroleum products as
agricultural commodities. Nor would petroleum
products fall within the second category. Even
though they could be viewed as derived from living
organisms—albeit organisms that lived millions of
years ago—such products would not qualify under
the ‘‘used primarily for human food, shelter, animal
feed or natural fiber’’ standard of category two.
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clarification, particularly the terms,
‘‘generally fungible,’’ ‘‘used primarily,’’
‘‘human food’’ and ‘‘natural fiber.’’
‘‘Generally fungible’’—means
substitutable or interchangeable within
general classes. For example, apples,
coffee beans, and cheese are generally
fungible within general classes, even
though there are various grades and
types, and so they would be agricultural
commodities. On the other hand,
commodities that have been processed
and have taken on a unique identity
would not be generally fungible. Thus,
while flax or mohair are generally
fungible natural fibers, lace and linen
garments made from flax, or sweaters
made from mohair, are not generally
fungible and would not be agricultural
commodities under category two.
‘‘Used primarily’’—means any
amount of usage over 50%. For
example, if 50% of the peaches
harvested, plus one, are used for human
food, then peaches fall within category
two.
‘‘Human food’’—includes drink. Thus
fruit juice, wine, and beer are ‘‘food’’ for
purposes of the definition of
‘‘agricultural commodity.’’
‘‘Natural fiber’’—means any naturally
occurring fiber that is capable of being
spun into a yarn or made into a fabric
by bonding or by interlacing in a variety
of methods including weaving, knitting,
braiding, felting, twisting, or webbing,
and which is the basic structural
element of textile products.
Based on the foregoing, therefore,
category two would include such
products as: Fruits and fruit juices;
vegetables and edible vegetable
products; edible products of enumerated
commodities, such as wheat flour and
corn meal; poultry; milk and milk
products, including cheese, nonfat dry
milk and dry whey; distiller’s dried
grain; eggs; cocoa beans, cocoa butter
and cocoa; coffee beans and ground
coffee; sugarcane, sugar beets, beet pulp
(used as animal feed), raw sugar,
molasses and refined sugar; honey; beer
and wine; shrimp; and silk, flax and
mohair.
Category two would also include stud
lumber, plywood, strand board and
structural panels because they are
derived from living organisms (trees),
are generally fungible (e.g., random
length 2 × 4s and 4 × 8 standard sheets
of plywood) and are used primarily for
human shelter—i.e., in the construction
of dwellings. Category two would not,
however, include industrial inputs such
as wood pulp, paper or cardboard, nor
would it include raw rubber, turpentine
or rosin. Although derived from living
organisms—trees—and generally
fungible, none of these products are
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used primarily for human food, shelter,
animal feed or natural fibers. On the
other hand, maple syrup and maple
sugar, also derived from trees, would be
‘‘agricultural commodities.’’ Rayon,
which is a fiber derived from trees or
other plants, falls out of category two
because it is not a natural fiber—i.e., it
must be chemically processed from
cellulose before it becomes fiber.
Category two would include high
fructose corn syrup, but not corn-based
products such as polylactic acid (a corn
derivative used in biodegradable
packaging), butanol (a chemical derived
from cornstarch and used in
plasticizers, resins, and brake fluid) or
other plant-based industrial products.
Category two would include pure
ethanol, which is derived from living
organisms (corn and other plants), is
generally fungible, and may be used for
human food (as an ingredient of
alcoholic beverages). However, it would
not include denatured ethanol, which is
used for fuel and for other industrial
uses, because denatured ethanol cannot
be used for human food. Likewise,
neither would Category 2 include other
plant or animal based renewable fuels,
such as methane or biodiesel. Fertilizer
and other agricultural chemicals, even
though they are used almost exclusively
in agriculture, would not fall within the
definition because they would not fit
into the food, shelter, animal feed, or
natural fiber category.
Category Three—Other Agricultural
Commodities
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Category three would include
commodities that do not readily fit into
the first two categories, but would
nevertheless be widely recognized as
commodities of an agricultural nature.
Such commodities would include, for
example, tobacco, products of
horticulture (e.g., ornamental plants),
and such other commodities used or
consumed by animals or humans as the
Commission may by rule, regulation or
order designate after notice and
opportunity for hearing. The
Commission would determine the status
of any such other commodities for
purposes of the Act and CFTC
regulations on a case-by-case basis as
questions arise in the context of specific
markets or transactions.
Category Four—Commodity-Based
Indexes
The term, ‘‘agricultural commodity,’’
also includes a commodity-based index
based wholly or principally on
underlying agricultural commodities.
Thus, for example, the Minneapolis
Grain Exchange (‘‘MGEX’’) wheat, corn
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and soybean price index contracts 38
would be considered contracts on
agricultural commodities—that is the
underlying single commodity index is
an agricultural commodity. Also, any
index made up of more than 50% of
agricultural commodities, since it is
based principally on underlying
agricultural commodities, would be
considered an agricultural commodity
for purposes of including it within the
agricultural commodity definition.
Thus, for example, a commodity-based
index composed of 20% each, wheat,
corn, soybeans, crude oil and gold, since
it is composed of more than 50%
agricultural commodities, would be an
agricultural commodity. Therefore,
swaps on such an index would be
subject to special rules (if any) that
might be adopted for agricultural
commodity swaps.39
The definition of an ‘‘excluded
commodity’’ in current CEA section
1a(13)(iii) 40 could be read to include
any index of agricultural commodities.
That definition provides that ‘‘excluded
commodity’’ means, among other things,
‘‘any economic or commercial index
based on prices, rates, values, or levels
that are not within the control of any
party to the relevant contract,
agreement, or transaction.’’ However,
such a reading is inconsistent with the
requirement in Dodd-Frank that swaps
in agricultural commodities be
permitted only pursuant to a section
4(c) order of the Commission. For
example, a swap contract based on a
price index of solely wheat should
reasonably be considered as a swap in
an agricultural commodity. Applying a
mechanical interpretation of the
definition of excluded commodity could
permit ‘‘gaming’’ by allowing an index
based principally, or even
overwhelmingly, on agricultural
commodities to evade any potential
limitations on trading agricultural
swaps that are found in the Dodd-Frank
Act. For this reason, the definition
issued herein would include an index
based wholly or principally on
underlying agricultural commodities.
38 The MGEX agricultural index products are
currently available for corn, soybeans, and various
types of wheat. These index products are
financially settled to a spot index of country origin
pricing as calculated by a firm called Data
Transmission Network (‘‘DTN’’). Cash settlement is
based upon the simple average of the spot prices
published on the last three trading days of the
settlement month.
39 See Commodity Options and Agricultural
Swaps, 75 FR 6095, Feb. 3, 2011.
40 New section 1a (19)(iii) as renumbered under
the Dodd-Frank Act.
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Onions
Onions present a unique case in that
onions are the only agricultural product
specifically excluded from the
enumerated commodities list in current
CEA section 1a(4). Also, Public Law 85–
839 prohibits the trading of onion
futures on any board of trade in the
United States.41 Nothing in the
definition issued herein affects the
prohibition on onion futures trading.
In defining an agricultural
commodity, given that term’s statutory
history, as well as the Act’s grammatical
construction, it would appear that
‘‘agricultural commodity’’ is a subset of
‘‘commodity’’ and, since onions are
excluded from the definition of
‘‘commodity,’’ onions cannot be
considered an ‘‘agricultural
commodity.’’ However, under the DoddFrank Act, the definition of ‘‘swap’’ in
new section 1a(47) of the CEA is not
limited to transactions based upon
‘‘commodities’’ as defined in current
section 1a(4) of the Act. Therefore,
under the CEA as amended by DoddFrank, a swap may be based upon an
item that is not defined as a
‘‘commodity.’’ Thus, onion swaps
would seem to be permissible, but
would not be considered to be swaps in
an ‘‘agricultural commodity’’ under the
definition contained herein.
C. Effects of Applying the Definition
It is also important to consider the
uses to which the definition will be
put—i.e., what would be the practical
effect of a commodity being classified as
an ‘‘agricultural commodity’’ under the
definition contained herein? One effect
is that the commodity would be covered
by any rules the Commission ultimately
adopts for agricultural swaps. If, based
on the current commodity options and
agricultural swaps proposal,42 it is
determined that agricultural swaps
should be treated the same as other
physical commodity swaps, the
definition should have no effect in the
agricultural swaps context.
The other significant effect of a
commodity being classified as an
‘‘agricultural commodity’’ is that the
commodity would be subject to the
timeframes for speculative position
limits for agricultural commodities,43
rather than the timeframes for
speculative limits for exempt
commodities. As discussed above, the
classification of a given commodity as
41 7
U.S.C. 13–1.
Commodity Options and Agricultural
Swaps, 76 FR 6095, Feb. 3, 2011.
43 Pursuant to section 737 of the Dodd-Frank Act,
the Commission is required to adopt speculative
position limits for agricultural commodities.
42 See
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‘‘agricultural’’ vs. ‘‘exempt’’ should have
no long-term practical effect on the
commodity or how it is traded in the
speculative limits context because: (1)
The definition will only apply to
commodities that are the subject of
actual swaps or futures trading; and (2)
the speculative limits for any such
commodities, as proposed, will be based
not on any general across-the-board
definition or principle, but on the
individual characteristics of each
commodity, its swaps/futures market,
and its underlying cash market.44
Part IV—Related Matters
A. Paperwork Reduction Act
The final rule will not impose any
new recordkeeping or information
collection requirements, or other
collections of information that require
approval of the Office of Management
and Budget under the Paperwork
Reduction Act.45 In the proposed rule,
the Commission invited public
comment on the accuracy of its estimate
that no additional recordkeeping or
information collection requirements or
changes to existing collection
requirements would result from the
proposed rule. The Commission
received no comments on the accuracy
of its estimate.
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B. Cost Benefit Considerations
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before issuing new
regulations under the Act. Section 15(a)
does not require the Commission to
quantify the costs and benefits of new
regulations or to determine whether the
benefits of adopted regulations
outweigh their costs. Rather, section
15(a) requires the Commission to
consider the costs and benefits of the
subject regulations in light of five broad
areas of market and public concern: (1)
Protection of market participants and
the public; (2) market efficiency,
competitiveness, and financial integrity;
(3) price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission may, in its discretion, give
greater weight to any one of the five
enumerated areas of concern and may,
in its discretion, determine that, not
withstanding its costs, a particular
regulation is necessary or appropriate to
protect the public interest or to
effectuate any of the provisions or
accomplish any of the purposes of the
CEA.
44 See Position Limits for Derivatives, 76 FR 4752,
Jan. 26, 2011.
45 44 U.S.C. 3501 et seq.
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The agricultural commodity
definition is not expected to impose any
significant costs on industry
participants. In addition, we believe that
public interest considerations required
by CEA section 15(a) weigh strongly in
favor of adopting and issuing the
agricultural commodity definition. The
public interest benefit is that the
definition provides legal certainty for
indentifying those commodities that are
agricultural commodities—and which
may be the subject of a ‘‘swap in an
agricultural commodity (as defined by
the [CFTC]).’’ See Dodd-Frank section
723(c)(3).46 And as stated in the NPRM,
defining an agricultural commodity for
purposes of the CEA would seem to
have limited immediate practical
effects. The NPRM noted that the
definition will be necessary for other
substantive rulemakings, such as the
timeframes for setting speculative
position limits for exempt and
agricultural commodities under section
737 of the Dodd-Frank Act and
determining the permissibility of
trading agricultural swaps under section
723(c)(3) and section 733 of the DoddFrank Act. Those other rulemakings
were discussed in the original cost
benefit analysis in the NPRM. As those
rules have now been proposed, the
respective costs and benefits of those
rules are discussed in those proposed
rules.47
Regarding comments received
concerning costs and benefits, Professor
Greenberger stressed that the cost
benefit analysis should concentrate on
protecting the public interest. The
professor noted that reasonable food
prices are in the public interest and
expressed his view that speculative
position limits are an effective tool to
curb excessive speculation that can
artificially raise food prices. Professor
Greenberger argued that any multiple
commodity index that references any
farm product should be included in the
definition of agricultural commodity.
Much like Professor Greenberger, IATP
believed that public interest
considerations, including food security,
should be paramount in the cost benefit
analysis. As noted in the summary of
comments above, the proposed position
limits rulemaking contains a provision
designed to prevent ‘‘gaming’’ of
speculative position limits in relation to
indexes, including indexes with
46 The Commission views this language as a
Congressional directive to provide a formal
definition of the term ‘‘agricultural commodity,’’
and by issuing this definition, the Commission is
following that directive.
47 See Position Limits for Derivatives, 76 FR 4752,
Jan. 26, 2011, and Commodity Options and
Agricultural Swaps, 76 FR 6095, Feb. 3, 2011.
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Sfmt 4700
41055
agricultural components. In addition,
this final rule includes a revised
commodity-based index provision that
would include any index made up of
more than 50% of agricultural
commodities in the agricultural
commodity definition. In contrast, the
proposed rule would only have
included an index made up of more
than 50% of a single agricultural
commodity.
The Commission also notes that
category three of the definition, which
permits the Commission to designate
new agricultural commodities after a
notice and comment period, is designed
to provide an appropriate level of
flexibility for the Commission as
unforeseen developments and
challenges emerge in relation to
agricultural commodities.
The Ag Swaps Working Group,
Gavilon, DFA and the CME Group
commented that clarifying that the
general operational definition in the
second category of the agricultural
commodity definition is self-executing
would increase legal certainty. The Ag
Swaps Working Group and DFA added
that such a clarification would be in the
public interest. As noted in the
summary of comments above, the
Commission has made such a
clarification.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act
(‘‘RFA’’) 48 requires that agencies
consider whether the rules they propose
will have a significant economic impact
on a substantial number of small entities
and, if so, provide a regulatory
flexibility analysis respecting the
impact. The rules contained herein
provide a definition that will largely be
used in other rulemakings and which,
by itself, imposes no significant new
regulatory requirements. Accordingly,
the Chairman, on behalf of the
Commission, hereby certifies pursuant
to 5 U.S.C. 605(b) that the rules will not
have a significant impact on a
substantial number of small entities.
List of Subjects in 17 CFR Part 1
Definitions, Agriculture, Agricultural
commodity.
In consideration of the foregoing, and
pursuant to the authority contained in
the Commodity Exchange Act and, in
particular, sections 2(a)(1), 5h, and 8a
thereof, 7 U.S.C. 2, 7b–3, and 12a, and
pursuant to the authority contained in
section 723(c)(3) of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act, Public Law 111–203,
124 Stat. 1376 (2010), the Commission
48 5
E:\FR\FM\13JYR1.SGM
U.S.C. 601 et seq.
13JYR1
41056
Federal Register / Vol. 76, No. 134 / Wednesday, July 13, 2011 / Rules and Regulations
hereby amends Chapter 1 of Title 17 of
the Code of Federal Regulations as
follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for Part 1 is
revised to read as follows:
■
Appendix 1—Commission Voting
Summary
On this matter, Chairman Gensler and
Commissioners Dunn, Sommers, O’Malia and
Chilton voted in the affirmative; no
Commissioner voted in the negative
Appendix 2—Statement of Chairman
Gary Gensler
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a–6p, 7, 7a,
7b, 7b–3, 8, 9, 12, 12a, 12c, 13a, 13a–1, 16,
16a, 19, 21, 23 and 24, unless otherwise
noted.
2. Section 1.3 is amended by adding
paragraph (zz) to read as follows:
I support the final rulemaking that defines
the term, ‘‘agricultural commodity.’’ The
Dodd-Frank Act requires that agricultural
commodities be defined. In a separate
rulemaking, the Commission will determine
the requirements that apply to swaps on
agricultural commodities.
[FR Doc. 2011–17626 Filed 7–12–11; 8:45 am]
■
BILLING CODE P
§ 1.3
Definitions.
*
*
*
*
*
(zz) Agricultural commodity. This
term means:
(1) The following commodities
specifically enumerated in the
definition of a ‘‘commodity’’ found in
section 1a of the Act: Wheat, cotton,
rice, corn, oats, barley, rye, flaxseed,
grain sorghums, mill feeds, butter, eggs,
Solanum tuberosum (Irish potatoes),
wool, wool tops, fats and oils (including
lard, tallow, cottonseed oil, peanut oil,
soybean oil and all other fats and oils),
cottonseed meal, cottonseed, peanuts,
soybeans, soybean meal, livestock,
livestock products, and frozen
concentrated orange juice, but not
onions;
(2) All other commodities that are, or
once were, or are derived from, living
organisms, including plant, animal and
aquatic life, which are generally
fungible, within their respective classes,
and are used primarily for human food,
shelter, animal feed or natural fiber;
(3) Tobacco, products of horticulture,
and such other commodities used or
consumed by animals or humans as the
Commission may by rule, regulation or
order designate after notice and
opportunity for hearing; and
(4) Commodity-based indexes based
wholly or principally on underlying
agricultural commodities.
*
*
*
*
*
mstockstill on DSK4VPTVN1PROD with RULES
Issued in Washington, DC, on July 7, 2011,
by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Agricultural Commodity
Definition—Commission Voting
Summary and Statements of
Commissioners
Note: The following appendices will not
appear in the Code of Federal Regulations
VerDate Mar<15>2010
16:32 Jul 12, 2011
Jkt 223001
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 249
[Release No. 34–64832; File No. S7–29–11]
RIN 3235–AL18
Amendment to Rule Filing
Requirements for Dually-Registered
Clearing Agencies
Securities and Exchange
Commission.
ACTION: Interim final rule; request for
comment.
AGENCY:
The Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
is adopting an interim final rule to
amend Rule 19b–4 under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’).
The amendment expands the list of
categories that qualify for summary
effectiveness under Section 19(b)(3)(A)
of the Exchange Act to include any
matter effecting a change in an existing
service of a clearing agency registered
with the Commission (‘‘Registered
Clearing Agency’’) that both primarily
affects the futures clearing operations of
the clearing agency with respect to
futures that are not security futures and
does not significantly affect any
securities clearing operations of the
clearing agency or any related rights or
obligations of the clearing agency or
persons using such service. The
Commission also is making a
corresponding technical modification to
the General Instructions for Form 19b–
4 under the Exchange Act. The
amendments to Rule 19b–4 and Form
19b–4 are intended to streamline the
rule filing process in areas involving
certain activities concerning nonsecurity products that may be subject to
overlapping regulation as a result of, in
part, certain provisions under Section
763(b) of the Dodd-Frank Wall Street
SUMMARY:
PO 00000
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Fmt 4700
Sfmt 4700
Reform and Consumer Protection Act of
2010 (‘‘Dodd-Frank Act’’) that would
deem some clearing agencies to be
registered with the Commission as of
July 16, 2011.
DATES: Effective Date: July 15, 2011.
Comment Date: Comments on the
interim final rule should be submitted
on or before September 15, 2011.
ADDRESSES: Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/proposed.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–29–11 on the subject line;
or
• Use the Federal eRulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F St., NE., Washington, DC 20549–
1090.
All submissions should refer to File
Number S7–29–11. This file number
should be included on the subject line
if e-mail is used. To help us process and
review your comments more efficiently,
please use only one method. The
Commission will post all comments on
the Commission’s Internet Web site
(https://www.sec.gov/rules/
proposed.shtml). Comments are also
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F St., NE.,
Washington, DC 20549 on official
business days between the hours of
10 a.m. and 3 p.m. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT:
Jeffrey S. Mooney, Assistant Director;
Joseph P. Kamnik, Senior Special
Counsel; and Andrew R. Bernstein,
Attorney-Adviser, Office of Clearance
and Settlement, Division of Trading and
Markets, Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–7010 at (202)
551–5710.
SUPPLEMENTARY INFORMATION: The
Commission is adopting an amendment
to Rule 19b–4 under the Exchange Act
as an interim final rule to expand the
list of categories that qualify for
E:\FR\FM\13JYR1.SGM
13JYR1
]]>Agencies
[Federal Register Volume 76, Number 134 (Wednesday, July 13, 2011)]
[Rules and Regulations]
[Pages 41048-41056]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17626]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AD23
Agricultural Commodity Definition
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is charged with proposing rules to implement new statutory
provisions enacted by Title VII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act,
which amends the Commodity Exchange Act (``CEA'' or ``Act''), includes
provisions applicable to ``a swap in an agricultural commodity (as
defined by the [CFTC]).'' Neither Congress nor the CFTC has previously
defined that term for purposes of the CEA or CFTC regulations. On
October 26, 2010, the Commission requested comment on a proposed
definition. After reviewing the comments submitted in response to the
proposed definition, the Commission has determined to issue these final
rules in essentially the same form as originally proposed, subject to a
minor revision to the commodity-based index provision.
DATES: Effective Date--September 12, 2011.
FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special
Counsel, (202) 418-5041, dheitman@cftc.gov, or Ryne Miller, Attorney
Advisor, (202) 418-5921, rmiller@cftc.gov, Division of Market
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Part I--Background
On July 21, 2010, President Obama signed the Dodd-Frank Wall Street
Reform and Consumer Protection Act.\1\ Title VII of the Dodd-Frank Act
\2\ amended the 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.
---------------------------------------------------------------------------
\1\ 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 https://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.
---------------------------------------------------------------------------
The Dodd-Frank Act includes provisions applicable to ``a swap in an
agricultural commodity (as defined by the [CFTC]).'' Neither Congress
nor the CFTC has previously defined ``agricultural commodity'' for
purposes of the CEA or CFTC regulations. On October 26, 2010, the
Commission issued a notice of proposed rulemaking requesting comment on
a proposed definition of agricultural commodity (the ``NPRM'').\4\
After reviewing the comments submitted in response to the proposed
definition,\5\ the Commission has determined to issue this final
definition in essentially the same form as originally proposed, subject
to a minor revision to the commodity-based index provision, for
purposes of the CEA and Commission regulations.
---------------------------------------------------------------------------
\4\ 75 FR 65586, Oct. 26, 2010.
\5\ Those comments are available on the Commission's Web site
at: https://comments.cftc.gov/PublicComments/CommentList.aspx?id=868.
---------------------------------------------------------------------------
[[Page 41049]]
A. Statutory Framework--``Agricultural Commodity''
1. Pre Dodd-Frank Act
For a detailed discussion of the pre Dodd-Frank statutory history
relating to the term agricultural commodity, please review the NPRM at
75 FR 65586-65587.
2. The Dodd-Frank Act
In addition to deleting two existing CEA provisions that referenced
agricultural commodities,\6\ the Dodd-Frank Act contains several new
provisions relating to agricultural commodities. Section 721(a)(21) of
the Dodd-Frank Act adds a new section 1a(47) to the CEA defining the
term ``swap.'' As part of the definition, clause (iii) of section
1a(47)(A) provides that a swap includes ``any agreement, contract, or
transaction commonly known as * * * an agricultural swap. * * *'' \7\
---------------------------------------------------------------------------
\6\ Pre Dodd Frank CEA sections 2(g) and 5a(b)(2)(F).
\7\ See new CEA section 1a(47)(A)(iii)(XX) as added by section
721(a)(21) of the Dodd-Frank Act.
---------------------------------------------------------------------------
Section 723(c)(3)(A) of the Dodd-Frank Act, which is a free-
standing provision that does not amend the CEA, contains a general rule
whereby, except as provided in section 723(c)(3)(B), ``no person shall
offer to enter into, enter into, or confirm the execution of, any swap
in an agricultural commodity (as defined by the [CFTC]).'' Section
723(c)(3)(B) provides that a swap in an agricultural commodity may be
permitted pursuant to the Commission's exemptive authority under CEA
section 4(c), ``or any rule, regulation, or order issued thereunder
(including any rule, regulation, or order in effect as of the date of
enactment of this Act) by the [CFTC] to allow swaps under such terms
and conditions as the Commission shall prescribe.''
Section 733 of the Dodd-Frank Act adds a new section 5h to the CEA
that governs the registration and regulation of swap execution
facilities. New CEA section 5h(b)(2) provides that a swap execution
facility ``may not list for trading or confirm the execution of any
swap in an agricultural commodity (as defined by the Commission) except
pursuant to a rule or regulation of the Commission allowing the swap
under such terms and conditions as the Commission shall prescribe.''
Section 737 of the Dodd-Frank Act amends CEA section 4a and
specifically directs the Commission to adopt position limits for
futures, DCM-traded options, and swaps that are economically equivalent
to futures and exchange-traded options for physical commodities other
than excluded commodities--that is, exempt and agricultural
commodities. Section 737 also sets timeframes for the adoption of such
position limits for both exempt and agricultural commodities.
B. Regulatory Framework--``Agricultural Commodity''
For a detailed discussion of the history surrounding the
Commission's regulatory framework related to the term agricultural
commodity, please review the NPRM at 75 FR 65588-65589. Under current
regulations, the term agricultural commodity is significant primarily
for parts 32 and 35.\8\ The final definition is not anticipated to have
any significant substantive impact outside of those rules.
---------------------------------------------------------------------------
\8\ 17 CFR part 32 and 17 CFR part 35.
---------------------------------------------------------------------------
In relation to parts 32 (dealing with commodity options) and 35
(dealing with swaps), the Commission, in a separate proposed
rulemaking, has proposed (1) to treat all commodity options that fall
within the Dodd-Frank definition of swap (including options on either
agricultural or non-agricultural commodities) the same as any other
swap, thereby doing away with the need to distinguish between an
agricultural commodity and any other type of commodity for the purpose
of identifying the applicable options rules, and (2) to treat swaps in
an agricultural commodity the same as any other swap, thereby doing
away with the need to distinguish between an agricultural commodity and
any other type of commodity for the purpose of identifying the
applicable swaps rules.\9\ The definition will also inform the
Commission's planned rulemaking addressing speculative position limits
on both agricultural and exempt commodities.\10\
---------------------------------------------------------------------------
\9\ The proposal to treat agricultural swaps the same as swaps
in other commodities was issued following an advance notice of
proposed rulemaking (``ANPRM'') that specifically asked whether
swaps in an agricultural commodity should be treated any differently
than other swaps. See 75 FR 59666, Sept. 28, 2010. The overwhelming
majority of the comments supported adopting a rule that would treat
swaps in an agricultural commodity the same as all other swaps, and
the proposed agricultural swaps rules that followed the ANPRM so
provide. (See: Commodity Options and Agricultural Swaps, 76 FR 6095,
February 3, 2011). If the final agricultural swaps rules should
reverse course and prohibit or limit agricultural swaps, the
Commission will take appropriate action to address any impact such
rule change might have with respect to the definition set out
herein.
\10\ See Sec. 737(a) of the Dodd-Frank Act; see also Position
Limits for Derivatives, 76 FR 4752, Jan. 26, 2011.
---------------------------------------------------------------------------
Part II--Summary of Comments; Commission Response to Comments
As noted above, on October 26, 2010 the Commission published for
comment a notice of proposed rulemaking that proposed a definition of
``agricultural commodity'' for purposes of the Commodity Exchange Act
and Commission regulations.\11\ The NPRM proposed a four category
definition, including:
---------------------------------------------------------------------------
\11\ 75 FR 65586, Oct. 26, 2010.
---------------------------------------------------------------------------
1. The enumerated commodities listed in section 1a of the CEA,
including such things as wheat, cotton, corn, the soybean complex,
livestock, etc.;
2. A general operational definition that covers: ``All other
commodities that are, or once were, or are derived from, living
organisms, including plant, animal and aquatic life, which are
generally fungible, within their respective classes, and are used
primarily for human food, shelter, animal feed, or natural fiber;''
3. A catch-all category for commodities that would generally be
recognized as agricultural in nature, but which do not fit within the
general operational definition. In addition to the specified
commodities named in category three (tobacco and the products of
horticulture), category three would also include other commodities
that, in future, would be classified as ``agricultural commodities'' as
a result of Commission action: ``Tobacco, products of horticulture, and
such other commodities used or consumed by animals or humans as the
Commission may by rule, regulation, or order designate after notice and
opportunity for hearing;'' and
4. Finally, a provision applicable to: ``Commodity-based contracts
based wholly or principally on a single underlying agricultural
commodity.''
In response to the NPRM, the Commission received twelve formal
comment letters \12\ representing a broad range of interests, including
producers, merchants, swap dealers, commodity funds, futures industry
organizations, academics, and policy organizations. In particular,
comment letters were received from the following persons or entities:
The Agricultural Swaps Working Group (``Ag Swaps Working Group''),
comprised of financial institutions that provide risk management and
investment products
[[Page 41050]]
to agricultural end users; BOK Financial (``BOK''); Better Markets,
Inc. (``Better Markets''); Commodity Markets Council (``CMC''); Dairy
Farmers of America, Inc. (``DFA''); the Gavilon Group, LLC
(``Gavilon''); Institute for Agriculture and Trade Policy (``IATP'');
CME Group, Inc. (``CME Group''); Minneapolis Grain Exchange (``MGEX'');
National Council of Farmer Cooperatives (``NCFC''); National Grain and
Feed Association (``NGFA''); and Michael Greenberger (``Professor
Greenberger''), a professor from the University of Maryland Law School.
In addition, on May 4, 2011, the Commission re-opened the comment
period on several of the Dodd-Frank rulemakings, including the proposed
agricultural commodity definition, to June 3, 2011.\13\ Of the
additional comments received, three specifically addressed substantive
concerns related to the proposed agricultural commodity definition--one
letter from Chris Barnard, discussed below; one letter from the
National Milk Producers Federation (``NMPF''), generally supporting the
proposed definition; and one letter from MGEX, reiterating the
arguments made in its earlier comments.\14\
---------------------------------------------------------------------------
\12\ The comment file also includes records of discussions with
three external parties (Land O'Lakes, Inc., a mixed group of
agricultural and academic interests, and an agricultural risk
manager from Kansas). At those meetings and/or phone calls, issues
tangential to the agricultural commodity definition rulemaking were
discussed between visitors and Commission representatives.
\13\ See 76 FR 25274, May 4, 2011.
\14\ Illustrated by the following quote from the NMPF letter,
the majority of the comments filed for the June 3, 2011 deadline
addressed issues outside of the scope of the agricultural commodity
definition; e.g. end user concerns, cooperative associations, and
the general regulatory regime for swaps:
NMPF agrees that the proposed rule provides a reasonable
definition of ``agricultural commodity'', with respect to milk,
dairy products, and common dairy feedstuffs.
However, this agreement must be seen in the context of our
concerns about the potential over-regulation of farmers, farmer
cooperative associations, and other commercial end users, including
small and limited resource farmers.
See letter from NMPF.
---------------------------------------------------------------------------
With minor variations discussed below, the majority of commenters
supported the definition of agricultural commodity as proposed. The
following statement from the NGFA is representative:
The NGFA is supportive of the Commission's efforts to define the
term ``agricultural commodity'' for purposes of implementing
provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Generally, we believe the proposed rule takes a
straightforward and common-sense approach to the issue and we have
no current objection to the categorization of various agricultural
commodities as detailed in the proposed rule.
In response to the Commission's questions, the NGFA at this time
is not aware of additional commodities that should be included in
the definition, though they may not fit neatly into the proposed
rule; nor are we aware of commodities that do fit the proposed
definition but should not be included. However, to accommodate
situations that could arise in the future as new products are
developed, the NGFA agrees that it would be prudent for the
Commission to maintain some flexibility to consider or reconsider
the status of any particular commodity as questions may arise in the
context of specific markets or transactions.\15\
---------------------------------------------------------------------------
\15\ See letter from NGFA.
Many of the commenters specifically supported the fact that the
proposed definition excludes biofuels.\16\ In addition, several
commenters further noted the appropriateness of the definition in a
regulatory regime where the Commission may decide to treat agricultural
swaps as it does all other swaps.\17\
---------------------------------------------------------------------------
\16\ See, e.g., letters from Gavilon, IATP, and the Ag Swaps
Working Group.
\17\ In fact, the Commission has recently proposed to treat
agricultural swaps the same as any other swap: See Commodity Options
and Agricultural Swaps, 75 FR 6095, Feb. 3, 2011.
---------------------------------------------------------------------------
General support for the proposed definition; request for
clarification on category two. Several commenters offered their general
support for the definition as proposed, requesting only that the
Commission clarify in any final rule that the second category of the
agricultural commodity definition is self-effectuating and will
encompass commodities that are now, or in the future may be, subject to
swaps, futures, and options trading, without the need for additional
CFTC action.\18\ These commenters suggested that such clarification
would be consistent with Congress' definition of ``commodity'' in the
CEA, which includes certain enumerated commodities and ``all other
goods and articles, * * * and all services, rights, and interests in
which contracts for future delivery are presently or in the future
dealt in.'' \19\
---------------------------------------------------------------------------
\18\ See, e.g., letters from CME Group, the Ag Swap Working
Group, Gavilon, and DFA.
\19\ See CEA section 1a(4).
---------------------------------------------------------------------------
In response to this request, the Commission wishes to clarify that
the general operational definition found in the second category is
self-executing and will encompass commodities that are now, or in the
future may become subject to swaps, futures, and options trading,
without the need for additional CFTC action. In this regard, the rule
defines those commodities that are agricultural commodities. It does
not matter whether futures, swaps, or options are being traded in the
commodity--either now or in the future.
Request for consideration of public comment regarding the
classification of new commodities. Other commenters asked that the
Commission provide a means for the public to comment upon and appeal
any Commission decision to include or exclude a particular commodity
from the list of agricultural commodities under any category of the
definition. As proposed, such a comment and appeal process is
contemplated only for commodities that may fall under category three of
the Commission's definition. In particular, subparagraph three of the
agricultural commodity definition would allow the Commission to
designate any other commodity used or consumed by animals or humans to
be an agricultural commodity ``by rule, regulation or order * * * after
notice and opportunity for hearing.'' \20\ CMC asked for a
clarification or expansion of this process:
---------------------------------------------------------------------------
\20\ See NPRM at 75 FR 65586 at 65593, Oct. 26, 2010.
We therefore urge the Commission to provide for an appeals
process for new instruments. To elaborate, we request that a
consistent process and time period be instated for appealing a CFTC
decision to include or exclude a particular commodity from the list
of agricultural commodities. We acknowledge that the CFTC in its
[NPRM] has made a provision for public hearings for Category 3
agricultural commodities, but we request that a process for public
comments and appeals be made broadly available in the context of
including or excluding an agricultural commodity under any category
of the definition.\21\
---------------------------------------------------------------------------
\21\ See letter from CMC.
On this topic, NGFA commented that in order to accommodate situations
that could arise in the future as new products are developed, it would
be prudent for the Commission to maintain some flexibility to consider
or reconsider the status of any particular commodity as questions may
arise in the context of specific markets or transactions.
In considering these comments, the Commission has determined that
the proposed definition, in conjunction with the Commission's existing
rules, already accommodates any concerns raised. With respect to
commodities already listed in categories one or two, the NPRM that
preceded these final rules provided an opportunity to question or
challenge the inclusion or exclusion of any commodity listed in those
categories. With respect to commodities not covered by the first two
categories, category three of the proposed definition permits the
Commission to designate any particular commodity as an ``agricultural
commodity,'' but only after notice and an opportunity for hearing.
Therefore, any time the Commission wishes to designate a particular
commodity as an ``agricultural commodity,'' it must
[[Page 41051]]
follow the procedures attendant to a normal notice and comment
rulemaking (i.e., issuing a notice of proposed rulemaking, allowing a
comment period, and then issuing a final rule or order). In addition,
any action by the Commission to remove a commodity from the definition
would constitute a regulatory amendment that would similarly require a
notice and comment rulemaking.
To the extent interested parties want to request that the
Commission amend or add to the definition on their own initiative, they
may submit a petition for issuance, amendment, or repeal of any rule
pursuant to Commission regulation 13.2.
New or innovative commodity products. While generally supportive of
the proposed definition, a comment letter from IATP expressed concern
with respect to the commercial commodification of currently
experimental commodities, ``It perhaps goes without saying that the
modification of traditional commodities by synthetic biology and other
nanotechnologies will pose many and complex regulatory challenges to
protect the public interest, should these commodities be traded under
contracts subject to CFTC rules.''\22\
---------------------------------------------------------------------------
\22\ See letter from IATP.
---------------------------------------------------------------------------
The Commission believes that categories two and three of the
definition, as proposed, appropriately provide for the inclusion of new
or innovative commodities within the definition of ``agricultural
commodity''--should such a determination become necessary.\23\ These
``new'' commodities will likely fall under category two of the
agricultural commodity definition as being ``used primarily for human
food, shelter, animal feed or natural fiber.'' And if they do not fall
under category two, the Commission may use category three to issue a
rule or order labeling them as agricultural commodities.
---------------------------------------------------------------------------
\23\ In this context, the Commission believes that the
definition is appropriately flexible to incorporate food substitutes
and other similar products should there be a need to do so at some
point in the future.
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Commodity-based indexes. Several commenters focused on subparagraph
four of the proposed definition, which would include ``commodity-based
contracts based wholly or principally on a single underlying
agricultural commodity.'' \24\ MGEX commented that subparagraph four
should be withdrawn altogether, arguing that cash-settled and
electronically traded contracts on indexes (such as contracts on MGEX's
various wheat, corn, and soybean cash-bid indexes) should remain
outside of the definition of agricultural commodity.\25\
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\24\ See NPRM at 75 FR 65586 at 65593, Oct. 26, 2010.
\25\ As will be discussed further below, MGEX's comment may be
based in part on confusion in the Commission's wording of
subparagraph four. As proposed, subparagraph four applies to
``commodity-based contracts'' when in fact the wording should have
read ``commodity-based indexes,'' and has been so corrected in the
final rule.
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The NCFC commented that, without information on the practical
effects of using a larger or smaller threshold than the proposed ``more
than 50%'' to define ``principally,'' it supports the more than 50%
level of a single commodity as proposed. However, they suggested future
review of that level if concerns are raised or potential issues need to
be addressed.\26\
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\26\ See letter from NCFC.
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Two commenters, Professor Greenberger and Better Markets, objected
to the fact that the ``based wholly or principally on a single
underlying agricultural commodity'' approach used in the proposed
definition would fail to include indexes that contained several
different agricultural commodities but had no concentration of greater
than 50% of any one commodity. Professor Greenberger argued that, ``The
Commission should include a contract based on an index that includes
agricultural commodities within the definition of agricultural
commodity, so that it may be subject, inter alia, to the later
rulemakings on speculative position limits under [section] 737 of the
Dodd-Frank Act.'' Better Markets expressed the concern that the
proposed definition could enable a person to avoid compliance with
other regulatory provisions specific to agricultural commodities, such
as speculative position limits. As a potential solution, Better Markets
proposed a revision to subparagraph four that would evaluate commodity-
based indexes on a pro-rata basis, with no minimum or maximum
percentage criterion. Under the Better Markets proposal, any contract
on a commodity-based index could be both (1) a contract on agricultural
commodities for that percentage of the index that is based on any
agricultural commodity, and (2) a contract on non-agricultural
commodities for that percentage of the index that is based on any non-
agricultural commodity.\27\ Thus, for example, a person holding a
contract on an index that is equally weighted in corn and soybeans
would be considered to have a position in both corn and soybeans and
this position would be aggregated with other corn and/or soybeans
positions held by that trader for purposes of complying with
speculative position limits applicable to either commodity.
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\27\ Better Markets proposed that subparagraph four read as
follows: ``Commodity-based contracts based on a single underlying
agricultural commodity; provided that contracts based on composite
prices in the form of an index, which composite prices include one
or more agricultural commodities, shall be considered to be one or
more commodity-based contracts pro-rata based on the relevant
weighting of each such single agricultural commodity in the index.''
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Chris Barnard's letter similarly suggested that the Commission
should revise category four to apply to ``commodity-based [indexes]
based wholly or principally on underlying agricultural commodities.''
In considering these comments, the Commission has determined to
refine category four as follows:
(a) In the final rule, the Commission has removed references to
contracts and added references to indexes, confirming that category
four applies to commodity-based indexes, rather than commodity-based
contracts on an index.
(b) In addition to the revisions described in (a), the text of
category four has been revised to include commodity-based indexes
``based wholly or principally on underlying agricultural
commodities''--as opposed to ``based wholly or principally on a single
underlying agricultural commodity.'' As a general matter, the Dodd-
Frank Act gives the Commission the authority to prohibit or otherwise
limit swaps in an agricultural commodity. In the event that the
Commission did take steps to generally prohibit or otherwise limit
swaps in an agricultural commodity, there would be legitimate concern
about the potential proliferation of ``agricultural commodity-based
indexes'' (and contracts thereon) being designed to replicate the
economic terms of otherwise prohibited swaps in an agricultural
commodity.
However, because the Commission has proposed to permit swaps in an
agricultural commodity to transact subject to the same rules applicable
to all other swaps, that concern is almost certainly moot.\28\ There
will be no incentive for regulatory arbitrage as between an
agricultural swap and a swap on an index that is economically
equivalent to an agricultural swap because both transactions would be
subject to the same regulatory scheme. Nonetheless, in response to
certain concerns raised by Professor Greenberger, Better Markets, and
Mr. Barnard, the Commission is expanding the commodity-based index
category of the agricultural commodity definition to
[[Page 41052]]
include not only any index that is concentrated at greater than 50% in
a single agricultural commodity, but also any index concentrated at
greater than 50% in agricultural commodities generally. Thus, for
example, an index composed of 25% each, wheat, corn, soybeans, and gold
would fall within the definition because more than 50% of that index is
composed of agricultural commodities, and any contract on that index
would be a contract on an agricultural commodity.
---------------------------------------------------------------------------
\28\ See footnote 9, above.
---------------------------------------------------------------------------
(c) As described above, the Better Markets comment letter also
raised a related concern about the potential for avoiding position
limits by using swaps on an index as an alternative to swaps on an
agricultural commodity. Professor Greenberger expanded the concern,
arguing that any multiple commodity index that references any farm
product should be included in the definition of agricultural commodity.
The Commission has considered these comments and notes the following:
(1) As proposed,\29\ position limits would be applied on a contract
by contract basis. That is, the inquiry into whether an index is an
``agricultural commodity'' is not relevant, because there are no
position limits that would apply broadly to a contract on an
``agricultural commodity.'' Rather, the proposed position limits apply
to positions in specific contracts, known as reference contracts (for
example, the CBOT corn contract, the CBOT wheat contract, etc.),
options thereon, and swaps economically equivalent thereto. The
relevant inquiry becomes whether a contract on an index (or pro rata
portion thereof) is economically equivalent to a reference contract, as
defined in the proposed position limit rules, and not whether an index
is or is not an agricultural commodity.
---------------------------------------------------------------------------
\29\ See Position Limits for Derivatives, 76 FR 4752, Jan. 26,
2011.
---------------------------------------------------------------------------
(2) The position limit rules directly address contracts on a
commodity-based index that would be used in an attempt to circumvent
the position limit rules. Specifically, the proposed position limit
rules provide that ``a commodity index contract that incorporates the
price of a commodity underlying a referenced contract's commodity,
which is used to circumvent speculative position limits, shall be
considered to be a referenced contract for the purpose of applying the
[proposed position limit rules].'' \30\
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\30\ Ibid.
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(d) As indicated above, MGEX favored withdrawing category four
altogether, arguing that cash-settled and electronically traded
contracts on indexes (such as contracts on MGEX's various wheat, corn,
and soybean cash-bid indexes) should remain outside of the definition
of agricultural commodity. In response, the Commission initially notes
that Dodd-Frank directs the Commission to adopt a definition of
agricultural commodity. Pursuant to section 723(c)(3) of the Dodd-Frank
Act, swaps in an agricultural commodity (as defined by the Commission)
are prohibited unless permitted by a CEA section 4(c) exemption.
However, because the agricultural swaps proposal \31\ will, if adopted
as proposed, permit agricultural swaps to transact subject to the same
rules applicable to any other swap, it appears that the practical
effect of being labeled an agricultural commodity (or avoiding the
label of agricultural commodity) will be immaterial.
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\31\ 76 FR 6095, Feb. 3, 2011.
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Still, the Commission will retain the authority, pursuant to
section 723(c)(3) of the Dodd-Frank Act, to revise or amend the
agricultural swaps rules and to place further limitations or
restrictions on swaps in an agricultural commodity in the future.\32\
For that reason, the Commission is taking the step now, via the
agricultural commodity definition, to remove any incentive for
regulatory gaming that could result from being able to avoid the label
of agricultural commodity by, for example, creating indexes, and then
executing contracts thereon, that act as the functional or economic
equivalent of otherwise limited or prohibited swaps on an agricultural
commodity. Accordingly, the Commission is retaining the commodity-based
index component in its agricultural commodity definition, as revised
herein.
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\32\ Note that the authority under section 723(c)(3) only
applies to swaps in an agricultural commodity and does not extend to
futures on an agricultural commodity.
---------------------------------------------------------------------------
Customer hedging. BOK submitted a comment letter requesting an
exemption from section 723(c)(3)(A) of the Dodd-Frank Act \33\ for
transactions that hedge customer positions, irrespective of whether the
underlying commodity is agricultural or non-agricultural. That is,
BOK's letter requests that the Commission provide a confirmation that
hedging transactions involving agricultural commodities will not be
subject to the Dodd-Frank Act's general prohibition of swaps in an
agricultural commodity. The Commission believes that the concerns
raised by BOK's letter have generally been addressed in the
Commission's proposed rules for agricultural swaps and commodity
options. Those rules would treat agricultural swaps, whether they
constitute hedging or speculation, the same as other swaps. Thus,
hedging transactions involving agricultural swaps would be subject to
the same standards as hedging transactions involving other
commodities.\34\
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\33\ Swaps in an agricultural commodity, other than those
currently permitted (for example, pursuant to part 35), are
generally prohibited under section 723(c)(3)(A) of the Dodd-Frank
Act, which is the provision cited by BOK. However, section
723(c)(3)(B) provides that the Commission, using its CEA section
4(c) authority, may expand the universe of agricultural swaps that
are permitted to trade. The Commission's recent agricultural swaps
and commodity options proposal would permit agricultural swaps
transactions to continue subject to all rules otherwise applicable
to any other swap. See 75 FR 6095, Feb. 3, 2011.
\34\ See Commodity Options and Agricultural Swaps, 76 FR 6095,
Feb. 3, 2011.
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Category two determinations. MGEX also commented briefly on the
Commission's explanatory example in the NPRM regarding the phrase
``used primarily'' in category two. Category two covers: ``All other
commodities that are, or once were, or are derived from, living
organisms, including plant, animal and aquatic life, which are
generally fungible, within their respective classes, and are used
primarily for human food, shelter, animal feed, or natural fiber.'' The
NPRM explained that the phrase ``used primarily'' means that if ``50%
of the peaches harvested, plus one, are used for human food'' then
peaches are an agricultural commodity. MGEX commented that this
definition could lead to a slippery slope of managing the use for each
crop and that the definition did not appear to provide for legal
certainty.
The Commission has considered MGEX's comment and determined to
retain category two as proposed, including the above-quoted explanation
of the phrase ``used primarily.'' Initially, and as noted above, the
difference between being labeled an agricultural commodity and any
other type of commodity is likely to have minimal or no impact because:
(1) The Commission has proposed rules to treat agricultural swaps the
same as any other swap; and (2) the position limit rules proposed by
the Commission would apply on a contract-by-contract basis and do not
key on whether or not a particular commodity is agricultural.
Beyond that, the Commission is not aware of, and MGEX did not
identify, any actual commodity where the ``amount used for human food,
shelter, animal feed, or natural fiber'' is so close to 50% as to
present a danger of being gamed for the purpose of avoiding the
application of the agricultural commodity definition. The point of the
[[Page 41053]]
Commission's proposed definition and accompanying explanation was to
draw a reasonable and common sense line between that which is
agricultural and that which is not. To the extent the prospect of
gaming this aspect of category two of the agricultural commodity
definition arises in the future, the Commission also points out that it
may use category three of the definition to declare any particular
commodity to be agricultural by issuing a rule, regulation, or order so
designating ``after notice and opportunity for hearing.''
Effective date. The final question facing the Commission was:
``What should be the effective date of the final definition?'' \35\ CME
Group noted that ``[o]nce adopted, the definition will also clarify the
scope of the exemptions under CEA sections 2(g) and 2(h)--at least
until Dodd-Frank takes effect and eliminates these exemptions.''
However, any clarification needed as between the agricultural commodity
definition and pre Dodd-Frank CEA provisions is being addressed in the
Commission's Dodd-Frank transition period relief.\36\ Beyond concerns
related to pre Dodd-Frank CEA provisions, NCFC noted that it was
``unaware of any reason not to make the definition of agricultural
commodity effective upon the publication of the final rule.''
---------------------------------------------------------------------------
\35\ The NPRM specifically noted:
[I]f the definition of an agricultural commodity is made
effective upon the publication of a final rule, it would provide
clarity as to what swaps are or are not eligible for the exemptions
found in current CEA [sections] 2(g) and 2(h) until the point at
which their repeal by the Dodd-Frank Act becomes effective. Is there
any reason not to make the definition of agricultural commodity
effective upon the publication of a final rule? Are there swaps
currently being transacted under [section] 2(g) or [section] 2(h)
that would be considered transactions in an agricultural commodity
(and thus potentially, temporarily illegal) under the definition
proposed herein? If so, should the effective date of the definition
be postponed until the repeal of current CEA [sections] 2(g) and
2(h), for all purposes other than for the setting of speculative
position limits, which will become effective prior to the repeal?
See NPRM at 65592.
\36\ See Effective Date for Swap Regulation, 76 FR 35372, June
17, 2011.
---------------------------------------------------------------------------
Therefore, the Commission has determined that the effective date of
the final agricultural commodity definition shall be sixty days after
the publication of this final rule, as required by the Dodd-Frank Act.
By providing that the definition becomes effective as early as is
allowed by the Dodd-Frank Act, the Commission intends to provide legal
certainty for market participants as they plan for the regulatory
regime that will follow the Dodd-Frank transition relief.
Part III--Explanation of the Definition
A. Terms of the Final Definition
Except for the revisions to category four (explained more fully
below), the terms of the final definition are the same as the terms of
the definition as proposed in the NPRM.
B. Explaining the Definition
Category One--Enumerated Agricultural Commodities
Category one includes the ``enumerated agricultural commodities''
specified in current section 1a(4) of the Act (renumbered as section
1a(9) under the Dodd-Frank Act). While there is considerable overlap
between categories one and two, category one includes some commodities
that would not qualify under category two. For example, ``fats and
oils'' would include plant-based oils, such as tung oil and linseed
oil, which are used solely for industrial purposes (and thus would not
fall within category two). Section 1a(4)'s reference to ``oils'' would
not, however, extend to petroleum products.\37\
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\37\ Petroleum products clearly would not fall within the
enumerated commodities. ``These itemized commodities are
agricultural in nature.'' Philip McBride Johnson, Commodities
Regulation, Sec. 1.01, p. 3 (1982). The Commission has never even
considered treating petroleum products as agricultural commodities.
Nor would petroleum products fall within the second category. Even
though they could be viewed as derived from living organisms--albeit
organisms that lived millions of years ago--such products would not
qualify under the ``used primarily for human food, shelter, animal
feed or natural fiber'' standard of category two.
---------------------------------------------------------------------------
Category Two: Operative Definition of Agricultural Commodities
As a general matter, Category 2 seeks to draw a line between
products derived from living organisms that are used for human food,
shelter, animal feed or natural fiber (covered by the definition) and
products that are produced through processing plant or animal-based
inputs to create products largely used as industrial inputs (outside
the definition). This general operational definition is self-executing
and will encompass commodities that are now or in the future may become
subject to swaps, futures, and options trading, without the need for
additional CFTC action. In this regard, the rule defines those
commodities that are agricultural commodities. It does not matter
whether futures, swaps, or options are being traded in the commodity--
either now or in the future. Thus, a commodity evaluated under category
two either is or is not an agricultural commodity regardless of its
trading status.
Some of the terms used in describing the second category require
further clarification, particularly the terms, ``generally fungible,''
``used primarily,'' ``human food'' and ``natural fiber.''
``Generally fungible''--means substitutable or interchangeable
within general classes. For example, apples, coffee beans, and cheese
are generally fungible within general classes, even though there are
various grades and types, and so they would be agricultural
commodities. On the other hand, commodities that have been processed
and have taken on a unique identity would not be generally fungible.
Thus, while flax or mohair are generally fungible natural fibers, lace
and linen garments made from flax, or sweaters made from mohair, are
not generally fungible and would not be agricultural commodities under
category two.
``Used primarily''--means any amount of usage over 50%. For
example, if 50% of the peaches harvested, plus one, are used for human
food, then peaches fall within category two.
``Human food''--includes drink. Thus fruit juice, wine, and beer
are ``food'' for purposes of the definition of ``agricultural
commodity.''
``Natural fiber''--means any naturally occurring fiber that is
capable of being spun into a yarn or made into a fabric by bonding or
by interlacing in a variety of methods including weaving, knitting,
braiding, felting, twisting, or webbing, and which is the basic
structural element of textile products.
Based on the foregoing, therefore, category two would include such
products as: Fruits and fruit juices; vegetables and edible vegetable
products; edible products of enumerated commodities, such as wheat
flour and corn meal; poultry; milk and milk products, including cheese,
nonfat dry milk and dry whey; distiller's dried grain; eggs; cocoa
beans, cocoa butter and cocoa; coffee beans and ground coffee;
sugarcane, sugar beets, beet pulp (used as animal feed), raw sugar,
molasses and refined sugar; honey; beer and wine; shrimp; and silk,
flax and mohair.
Category two would also include stud lumber, plywood, strand board
and structural panels because they are derived from living organisms
(trees), are generally fungible (e.g., random length 2 x 4s and 4 x 8
standard sheets of plywood) and are used primarily for human shelter--
i.e., in the construction of dwellings. Category two would not,
however, include industrial inputs such as wood pulp, paper or
cardboard, nor would it include raw rubber, turpentine or rosin.
Although derived from living organisms--trees--and generally fungible,
none of these products are
[[Page 41054]]
used primarily for human food, shelter, animal feed or natural fibers.
On the other hand, maple syrup and maple sugar, also derived from
trees, would be ``agricultural commodities.'' Rayon, which is a fiber
derived from trees or other plants, falls out of category two because
it is not a natural fiber--i.e., it must be chemically processed from
cellulose before it becomes fiber.
Category two would include high fructose corn syrup, but not corn-
based products such as polylactic acid (a corn derivative used in
biodegradable packaging), butanol (a chemical derived from cornstarch
and used in plasticizers, resins, and brake fluid) or other plant-based
industrial products. Category two would include pure ethanol, which is
derived from living organisms (corn and other plants), is generally
fungible, and may be used for human food (as an ingredient of alcoholic
beverages). However, it would not include denatured ethanol, which is
used for fuel and for other industrial uses, because denatured ethanol
cannot be used for human food. Likewise, neither would Category 2
include other plant or animal based renewable fuels, such as methane or
biodiesel. Fertilizer and other agricultural chemicals, even though
they are used almost exclusively in agriculture, would not fall within
the definition because they would not fit into the food, shelter,
animal feed, or natural fiber category.
Category Three--Other Agricultural Commodities
Category three would include commodities that do not readily fit
into the first two categories, but would nevertheless be widely
recognized as commodities of an agricultural nature. Such commodities
would include, for example, tobacco, products of horticulture (e.g.,
ornamental plants), and such other commodities used or consumed by
animals or humans as the Commission may by rule, regulation or order
designate after notice and opportunity for hearing. The Commission
would determine the status of any such other commodities for purposes
of the Act and CFTC regulations on a case-by-case basis as questions
arise in the context of specific markets or transactions.
Category Four--Commodity-Based Indexes
The term, ``agricultural commodity,'' also includes a commodity-
based index based wholly or principally on underlying agricultural
commodities. Thus, for example, the Minneapolis Grain Exchange
(``MGEX'') wheat, corn and soybean price index contracts \38\ would be
considered contracts on agricultural commodities--that is the
underlying single commodity index is an agricultural commodity. Also,
any index made up of more than 50% of agricultural commodities, since
it is based principally on underlying agricultural commodities, would
be considered an agricultural commodity for purposes of including it
within the agricultural commodity definition. Thus, for example, a
commodity-based index composed of 20% each, wheat, corn, soybeans,
crude oil and gold, since it is composed of more than 50% agricultural
commodities, would be an agricultural commodity. Therefore, swaps on
such an index would be subject to special rules (if any) that might be
adopted for agricultural commodity swaps.\39\
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\38\ The MGEX agricultural index products are currently
available for corn, soybeans, and various types of wheat. These
index products are financially settled to a spot index of country
origin pricing as calculated by a firm called Data Transmission
Network (``DTN''). Cash settlement is based upon the simple average
of the spot prices published on the last three trading days of the
settlement month.
\39\ See Commodity Options and Agricultural Swaps, 75 FR 6095,
Feb. 3, 2011.
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The definition of an ``excluded commodity'' in current CEA section
1a(13)(iii) \40\ could be read to include any index of agricultural
commodities. That definition provides that ``excluded commodity''
means, among other things, ``any economic or commercial index based on
prices, rates, values, or levels that are not within the control of any
party to the relevant contract, agreement, or transaction.'' However,
such a reading is inconsistent with the requirement in Dodd-Frank that
swaps in agricultural commodities be permitted only pursuant to a
section 4(c) order of the Commission. For example, a swap contract
based on a price index of solely wheat should reasonably be considered
as a swap in an agricultural commodity. Applying a mechanical
interpretation of the definition of excluded commodity could permit
``gaming'' by allowing an index based principally, or even
overwhelmingly, on agricultural commodities to evade any potential
limitations on trading agricultural swaps that are found in the Dodd-
Frank Act. For this reason, the definition issued herein would include
an index based wholly or principally on underlying agricultural
commodities.
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\40\ New section 1a (19)(iii) as renumbered under the Dodd-Frank
Act.
---------------------------------------------------------------------------
Onions
Onions present a unique case in that onions are the only
agricultural product specifically excluded from the enumerated
commodities list in current CEA section 1a(4). Also, Public Law 85-839
prohibits the trading of onion futures on any board of trade in the
United States.\41\ Nothing in the definition issued herein affects the
prohibition on onion futures trading.
---------------------------------------------------------------------------
\41\ 7 U.S.C. 13-1.
---------------------------------------------------------------------------
In defining an agricultural commodity, given that term's statutory
history, as well as the Act's grammatical construction, it would appear
that ``agricultural commodity'' is a subset of ``commodity'' and, since
onions are excluded from the definition of ``commodity,'' onions cannot
be considered an ``agricultural commodity.'' However, under the Dodd-
Frank Act, the definition of ``swap'' in new section 1a(47) of the CEA
is not limited to transactions based upon ``commodities'' as defined in
current section 1a(4) of the Act. Therefore, under the CEA as amended
by Dodd-Frank, a swap may be based upon an item that is not defined as
a ``commodity.'' Thus, onion swaps would seem to be permissible, but
would not be considered to be swaps in an ``agricultural commodity''
under the definition contained herein.
C. Effects of Applying the Definition
It is also important to consider the uses to which the definition
will be put--i.e., what would be the practical effect of a commodity
being classified as an ``agricultural commodity'' under the definition
contained herein? One effect is that the commodity would be covered by
any rules the Commission ultimately adopts for agricultural swaps. If,
based on the current commodity options and agricultural swaps
proposal,\42\ it is determined that agricultural swaps should be
treated the same as other physical commodity swaps, the definition
should have no effect in the agricultural swaps context.
---------------------------------------------------------------------------
\42\ See Commodity Options and Agricultural Swaps, 76 FR 6095,
Feb. 3, 2011.
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The other significant effect of a commodity being classified as an
``agricultural commodity'' is that the commodity would be subject to
the timeframes for speculative position limits for agricultural
commodities,\43\ rather than the timeframes for speculative limits for
exempt commodities. As discussed above, the classification of a given
commodity as
[[Page 41055]]
``agricultural'' vs. ``exempt'' should have no long-term practical
effect on the commodity or how it is traded in the speculative limits
context because: (1) The definition will only apply to commodities that
are the subject of actual swaps or futures trading; and (2) the
speculative limits for any such commodities, as proposed, will be based
not on any general across-the-board definition or principle, but on the
individual characteristics of each commodity, its swaps/futures market,
and its underlying cash market.\44\
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\43\ Pursuant to section 737 of the Dodd-Frank Act, the
Commission is required to adopt speculative position limits for
agricultural commodities.
\44\ See Position Limits for Derivatives, 76 FR 4752, Jan. 26,
2011.
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Part IV--Related Matters
A. Paperwork Reduction Act
The final rule will not impose any new recordkeeping or information
collection requirements, or other collections of information that
require approval of the Office of Management and Budget under the
Paperwork Reduction Act.\45\ In the proposed rule, the Commission
invited public comment on the accuracy of its estimate that no
additional recordkeeping or information collection requirements or
changes to existing collection requirements would result from the
proposed rule. The Commission received no comments on the accuracy of
its estimate.
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\45\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
B. Cost Benefit Considerations
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before issuing new regulations under
the Act. Section 15(a) does not require the Commission to quantify the
costs and benefits of new regulations or to determine whether the
benefits of adopted regulations outweigh their costs. Rather, section
15(a) requires the Commission to consider the costs and benefits of the
subject regulations in light of five broad areas of market and public
concern: (1) Protection of market participants and the public; (2)
market efficiency, competitiveness, and financial integrity; (3) price
discovery; (4) sound risk management practices; and (5) other public
interest considerations. The Commission may, in its discretion, give
greater weight to any one of the five enumerated areas of concern and
may, in its discretion, determine that, not withstanding its costs, a
particular regulation is necessary or appropriate to protect the public
interest or to effectuate any of the provisions or accomplish any of
the purposes of the CEA.
The agricultural commodity definition is not expected to impose any
significant costs on industry participants. In addition, we believe
that public interest considerations required by CEA section 15(a) weigh
strongly in favor of adopting and issuing the agricultural commodity
definition. The public interest benefit is that the definition provides
legal certainty for indentifying those commodities that are
agricultural commodities--and which may be the subject of a ``swap in
an agricultural commodity (as defined by the [CFTC]).'' See Dodd-Frank
section 723(c)(3).\46\ And as stated in the NPRM, defining an
agricultural commodity for purposes of the CEA would seem to have
limited immediate practical effects. The NPRM noted that the definition
will be necessary for other substantive rulemakings, such as the
timeframes for setting speculative position limits for exempt and
agricultural commodities under section 737 of the Dodd-Frank Act and
determining the permissibility of trading agricultural swaps under
section 723(c)(3) and section 733 of the Dodd-Frank Act. Those other
rulemakings were discussed in the original cost benefit analysis in the
NPRM. As those rules have now been proposed, the respective costs and
benefits of those rules are discussed in those proposed rules.\47\
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\46\ The Commission views this language as a Congressional
directive to provide a formal definition of the term ``agricultural
commodity,'' and by issuing this definition, the Commission is
following that directive.
\47\ See Position Limits for Derivatives, 76 FR 4752, Jan. 26,
2011, and Commodity Options and Agricultural Swaps, 76 FR 6095, Feb.
3, 2011.
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Regarding comments received concerning costs and benefits,
Professor Greenberger stressed that the cost benefit analysis should
concentrate on protecting the public interest. The professor noted that
reasonable food prices are in the public interest and expressed his
view that speculative position limits are an effective tool to curb
excessive speculation that can artificially raise food prices.
Professor Greenberger argued that any multiple commodity index that
references any farm product should be included in the definition of
agricultural commodity. Much like Professor Greenberger, IATP believed
that public interest considerations, including food security, should be
paramount in the cost benefit analysis. As noted in the summary of
comments above, the proposed position limits rulemaking contains a
provision designed to prevent ``gaming'' of speculative position limits
in relation to indexes, including indexes with agricultural components.
In addition, this final rule includes a revised commodity-based index
provision that would include any index made up of more than 50% of
agricultural commodities in the agricultural commodity definition. In
contrast, the proposed rule would only have included an index made up
of more than 50% of a single agricultural commodity.
The Commission also notes that category three of the definition,
which permits the Commission to designate new agricultural commodities
after a notice and comment period, is designed to provide an
appropriate level of flexibility for the Commission as unforeseen
developments and challenges emerge in relation to agricultural
commodities.
The Ag Swaps Working Group, Gavilon, DFA and the CME Group
commented that clarifying that the general operational definition in
the second category of the agricultural commodity definition is self-
executing would increase legal certainty. The Ag Swaps Working Group
and DFA added that such a clarification would be in the public
interest. As noted in the summary of comments above, the Commission has
made such a clarification.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA'') \48\ requires that
agencies consider whether the rules they propose will have a
significant economic impact on a substantial number of small entities
and, if so, provide a regulatory flexibility analysis respecting the
impact. The rules contained herein provide a definition that will
largely be used in other rulemakings and which, by itself, imposes no
significant new regulatory requirements. Accordingly, the Chairman, on
behalf of the Commission, hereby certifies pursuant to 5 U.S.C. 605(b)
that the rules will not have a significant impact on a substantial
number of small entities.
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\48\ 5 U.S.C. 601 et seq.
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List of Subjects in 17 CFR Part 1
Definitions, Agriculture, Agricultural commodity.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, sections
2(a)(1), 5h, and 8a thereof, 7 U.S.C. 2, 7b-3, and 12a, and pursuant to
the authority contained in section 723(c)(3) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, Public Law 111-203, 124
Stat. 1376 (2010), the Commission
[[Page 41056]]
hereby amends Chapter 1 of Title 17 of the Code of Federal Regulations
as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for Part 1 is revised to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a-6p, 7, 7a, 7b, 7b-3, 8, 9,
12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24, unless
otherwise noted.
0
2. Section 1.3 is amended by adding paragraph (zz) to read as follows:
Sec. 1.3 Definitions.
* * * * *
(zz) Agricultural commodity. This term means:
(1) The following commodities specifically enumerated in the
definition of a ``commodity'' found in section 1a of the Act: Wheat,
cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill
feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool
tops, fats and oils (including lard, tallow, cottonseed oil, peanut
oil, soybean oil and all other fats and oils), cottonseed meal,
cottonseed, peanuts, soybeans, soybean meal, livestock, livestock
products, and frozen concentrated orange juice, but not onions;
(2) All other commodities that are, or once were, or are derived
from, living organisms, including plant, animal and aquatic life, which
are generally fungible, within their respective classes, and are used
primarily for human food, shelter, animal feed or natural fiber;
(3) Tobacco, products of horticulture, and such other commodities
used or consumed by animals or humans as the Commission may by rule,
regulation or order designate after notice and opportunity for hearing;
and
(4) Commodity-based indexes based wholly or principally on
underlying agricultural commodities.
* * * * *
Issued in Washington, DC, on July 7, 2011, by the Commission.
David A. Stawick,
Secretary of the Commission.
Appendices to Agricultural Commodity Definition--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 Gens
