Agricultural Swaps, 49291-49300 [2011-20337]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Rules and Regulations]
[Pages 49291-49300]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-20337]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 35

RIN 3038-AD21


Agricultural Swaps

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is charged with proposing rules to implement new statutory 
provisions enacted by Title VII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act (``Dodd-Frank Act''). The Dodd-Frank Act 
provides that swaps in an agricultural commodity (as defined by the 
Commission) are prohibited unless entered into pursuant to a rule, 
regulation or order of the Commission adopted pursuant to certain 
provisions of the Commodity Exchange Act (``CEA'' or ``Act''). On 
February 3, 2011, the Commission requested comment on a set of proposed 
rules that would, among other things, implement regulations whereby 
swaps in agricultural commodities may transact subject to the same 
rules as all other swaps. The proposed rules for swaps in an 
agricultural commodity would repeal and replace the Commission's 
current regulations concerning the exemption of swap agreements. After 
reviewing the comments submitted in response to the proposed rules, the 
Commission has determined to issue these final rules for swaps in an 
agricultural commodity in the form as originally proposed. The February 
3, 2011, proposed rules also included provisions that would 
substantially amend the Commission's regulations regarding commodity 
option transactions. However, in this final rule the Commission is only 
issuing the rules for swaps in an agricultural commodity. The proposed 
rules for commodity option transactions will be addressed at a later 
date.

DATES: Effective Date--December 31, 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: 

I. Introduction

A. Dodd-Frank Act

    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.
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    \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.
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B. Proposed Agricultural Swaps Rules

    Section 723(c)(3) of the Dodd-Frank Act provides that swaps in an 
agricultural commodity (as defined by the Commission) \4\ are 
prohibited unless entered into pursuant to a rule, regulation or order 
of the Commission adopted pursuant to CEA section 4(c).

[[Page 49292]]

Further, section 733 of the Dodd-Frank Act, new CEA section 5h(b)(2), 
provides that a swap execution facility (``SEF'') 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.
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    \4\ As discussed below, in accordance with the mandate of the 
Dodd-Frank Act, the Commission recently promulgated a final rule 
defining the term ``agricultural commodity.'' See 76 FR 41048, July 
13, 2011.
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    As a result of the Dodd-Frank changes, on February 3, 2011, the 
Commission published in the Federal Register a notice of proposed 
rulemaking to withdraw current part 35 of the Commission's regulations 
\5\ and replace it with a new part 35 that would essentially permit the 
transaction of swaps in an agricultural commodity (or, ``agricultural 
swaps'') \6\ subject to the same rules and regulations applicable to 
any other swap (the ``NPRM'').\7\ The NPRM was preceded by an advanced 
notice of proposed rulemaking wherein the Commission sought general 
comment on the agricultural swaps provisions in the Dodd-Frank Act (the 
``ANPRM'').\8\ The NPRM included an overview and summary of the 
comments received on the ANPRM, which generally favored treating 
agricultural swaps the same as every other swap.
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    \5\ 17 CFR part 35.
    \6\ When this notice refers to ``agricultural swaps,'' it is 
referring to swaps in an agricultural commodity, as identified in 
section 723(c)(3) of the Dodd-Frank Act.
    \7\ See Commodity Options and Agricultural Swaps, 76 FR 6095, 
February 3, 2011.
    \8\ See Agricultural Swaps, 75 FR 59666, Sept. 28, 2010.
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C. Proposed Commodity Options Rules

    Because the Dodd-Frank Act statutory definition of a swap includes 
commodity options (other than options on futures),\9\ the NPRM also 
included proposed provisions that would substantially amend the 
Commission's regulations regarding commodity option transactions. At 
this time, the Commission is only finalizing the rules for agricultural 
swaps in amended part 35 of the Commission's regulations. The proposed 
rules for commodity options--including proposed amendments to parts 3, 
32, and 33--will be addressed at a later date.
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    \9\ Section 721 of the Dodd-Frank Act adds new section 1a(47) to 
the CEA, defining ``swap'' to include not only ``any agreement, 
contract, or transaction commonly known as,'' among other things, 
``an agricultural swap'' or ``a commodity swap,'' but also ``[an] 
option of any kind that is for the purchase or sale, or based on the 
value, of * * * commodities * * *.'' However, the NPRM notes that 
the new swap definition did not include options on futures, options 
on any security, certificate of deposit, or group or index of 
securities, including any interest therein or based on the value 
thereof, that is subject to the Securities Act of 1933 and the 
Securities Exchange Act of 1934 (see new CEA section 
1a(47)(B)(iii)), and foreign currency options entered into on a 
national securities exchange registered pursuant to section 6(a) of 
the Securities Exchange Act of 1934 (see new CEA section 
1a(47)(B)(iv)).
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D. Final Agricultural Swaps Rules

    Accordingly, the preamble to this final rule reviews the statutory 
and regulatory framework governing agricultural swaps, as discussed in 
the NPRM,\10\ provides an overview and summary of the comments received 
on the agricultural swaps rules proposed in the NPRM, and includes an 
explanation of the final rules issued herein. This preamble also 
includes a discussion of CEA section 4(c), the primary statutory 
authority for the agricultural swaps rules,\11\ and a detailed 
discussion of the costs and benefits of the final rule, along with a 
review of those comments specifically addressing the costs and benefits 
of the proposed agricultural swaps rules.
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    \10\ See NPRM, 76 FR at 6096 at 6096-97, Feb. 3, 2011.
    \11\ In addition to 4(c), these final rules are also being 
adopted pursuant to the Commission's authority under CEA section 
4c(b)--just as original part 35 was adopted pursuant to both CEA 
section 4(c) and 4c(b).
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II. Agricultural Swaps Background

A. Pre Dodd-Frank Swaps Provisions

    As explained in the NPRM, beginning in 2000, bilateral swaps 
between certain sophisticated counterparties were generally exempted 
from the Commission's jurisdiction pursuant to pre Dodd-Frank CEA 
section 2(g),\12\ which was added to the CEA by the Commodity Futures 
Modernization Act of 2000 (``CFMA'').\13\ However, pre Dodd-Frank 
section 2(g) specifically excluded an ``agreement, contract, or 
transaction'' in an ``agricultural commodity'' from the CFMA swaps 
exemption.\14\ While the term ``agricultural commodity'' is not 
specifically defined in the Act, the Commission recently adopted a 
final rule defining ``agricultural commodity.'' \15\
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    \12\ Pre Dodd-Frank section 2(g) provided:
    No provision of this Act (other than section 5a (to the extent 
provided in section 5a(g)), 5b, 5d, or 12(e)(2)) shall apply to or 
govern any agreement, contract, or transaction in a commodity other 
than an agricultural commodity if the agreement, contract, or 
transaction is--
    (1) Entered into only between persons that are eligible contract 
participants at the time they enter into the agreement, contract, or 
transaction;
    (2) subject to individual negotiation by the parties; and
    (3) not executed or traded on a trading facility.
    Pre Dodd-Frank CEA section 2(g). Note that section 2(g) is among 
those sections of the CEA that were repealed by the Dodd-Frank Act, 
effective July 16, 2011.
    \13\ Pre Dodd-Frank CEA section 2(g) was added to the CEA as 
section 105(b) of the CFMA, enacted as Appendix E to Public Law 106-
554.
    \14\ Notably, pre Dodd-Frank CEA section 2(g) is not the only 
statutory provision added by the CFMA that excluded or exempted 
bilateral swaps between eligible contract participants from the 
Commission's jurisdiction. Pre Dodd-Frank CEA section 2(d)(1) 
excluded any such bilateral ``agreement, contract, or transaction'' 
in excluded commodities from Commission jurisdiction, while pre 
Dodd-Frank CEA section 2(h)(1) created a similar exemption for a 
``contract, agreement or transaction'' in exempt commodities. Both 
sections 2(d)(1) and 2(h)(1) were also among the CEA provisions 
repealed by the Dodd-Frank Act, effective July 16, 2011.
    \15\ See Agricultural Commodity Definition, 76 FR 41048, July 
13, 2011.
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    The effect of the pre Dodd-Frank CEA sections explicitly excluding 
agricultural commodities from the CFMA statutory swaps exemptions and 
exclusions was that swaps involving exempt and excluded commodities 
were allowed to transact largely outside of the Commission's 
jurisdiction or oversight, while swaps in agricultural commodities had 
to continue to rely on authority found in pre-CFMA law. As discussed in 
greater detail below, that pre-CFMA authority was found in part 35 of 
the Commission's regulations.
    Part 35 originally provided a broad exemption for certain swap 
agreements and applied to swaps in all commodities.\16\ After the CFMA 
amendments to the CEA, which statutorily exempted swaps on ``exempt'' 
and ``excluded'' commodities from virtually all of the Commission's 
jurisdiction, part 35 remained relevant only for agricultural swaps. 
With the exception of three outstanding exemptive orders related to 
cleared agricultural basis and calendar swaps \17\

[[Page 49293]]

(which orders exempt certain swaps transactions from part 35's non-
fungibility and counterparty creditworthiness requirements), part 35 is 
the sole existing authority under which market participants may 
transact agricultural swaps that are not options.\18\
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    \16\ Part 35 provides eligible swap participants (as defined in 
Sec.  35.1(b)(2)) with a general exemption from the CEA for a swap 
that is not part of a fungible class of agreements that are 
standardized as to their material economic terms, where the 
creditworthiness of each counterparty is a material consideration in 
entering into or determining the terms of the swap, and the swap is 
not entered into and traded on or through a multilateral transaction 
execution facility. See Sec.  35.2.
    \17\ Part 35, at Sec.  35.2(d), also provides that ``any person 
may apply to the Commission for exemption from any of the provisions 
of the Act (except 2(a)(1)(B) [liability of principal for act of 
agent]) for other arrangements or facilities, on such terms and 
conditions as the Commission deems appropriate, including but not 
limited to, the applicability of other regulatory regimes.'' See 17 
CFR 35.2(d). The Commission has granted three such exemptions, which 
have in each instance been styled as exemptive orders pursuant to 
CEA section 4(c). See
    1. Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act (a) Permitting Eligible Swap Participants To Submit for Clearing 
and ICE Clear U.S., Inc. and Futures Commission Merchants To Clear 
Certain Over-The-Counter Agricultural Swaps and (b) Determining 
Certain Floor Brokers and Traders To Be Eligible Swap Participants; 
and (2) Pursuant to Section 4d of the Commodity Exchange Act, 
Permitting Certain Customer Positions in the Foregoing Swaps and 
Associated Property To Be Commingled With Other Property Held in 
Segregated Accounts, 73 FR 77015, Dec. 18, 2008;
    2. Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act, Permitting the Chicago Mercantile Exchange to Clear Certain 
Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d 
of the Commodity Exchange Act, Permitting Customer Positions in Such 
Cleared-Only Contracts and Associated Funds To Be Commingled With 
Other Positions and Funds Held in Customer Segregated Accounts, 74 
FR 12316, Mar. 24, 2009; and
    3. Order (1) Pursuant to Section 4(c) of the Commodity Exchange 
Act, Permitting the Kansas City Board of Trade Clearing Corporation 
To Clear Over-the-Counter Wheat Calendar Swaps and (2) Pursuant to 
Section 4d of the Commodity Exchange Act, Permitting Customer 
Positions in Such Cleared-Only Swaps and Associated Funds To Be 
Commingled With Other Positions and Funds Held in Customer 
Segregated Accounts, 75 FR 34983, June 21, 2010.
    \18\ Issues related to options on agricultural commodities were 
reviewed in detail in the NPRM, 76 FR 6095 at 6097-98, Feb. 3, 2011. 
As noted above, final rules regarding the post Dodd-Frank treatment 
of commodity options will be addressed by the Commission at a later 
date.
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B. Dodd-Frank Swaps Provisions

i. Non-Agricultural Swaps
    As explained in the introduction, the Dodd-Frank Act amended the 
CEA to remove the CFMA swaps exemptions and exclusions and to create a 
new regulatory regime for swaps. Under the CEA, as amended by the Dodd-
Frank Act, only eligible contract participants (``ECPs'') \19\ may 
enter into a swap, unless such swap is entered into on a designated 
contract market (``DCM''),\20\ in which case any person may enter into 
the swap.\21\
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    \19\ ``Eligible contract participant'' is defined in CEA section 
1a(18). A proposal to further define the term is also currently 
pending. See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR 
80174, Dec. 21, 2010 (joint rulemaking with Securities and Exchange 
Commission (``SEC''). The comment period closed February 22, 2011.
    \20\ A designated contract market is a board of trade designated 
as a contract market under CEA section 5.
    \21\ See new CEA section 2(e) as added by section 723(a)(2) of 
the Dodd-Frank Act.
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    New CEA section 2(h), as added by section 723(a)(3) of the Dodd-
Frank Act, establishes a clearing requirement for swaps. Under that 
subsection, the Commission would determine, based on factors listed in 
the statute, whether a swap, or a group, category, type, or class of 
swaps, should be required to be cleared. A swap that is required to be 
cleared must be executed on a DCM or a SEF,\22\ if a DCM or SEF makes 
the swap available for trading. Swaps that are not required to be 
cleared may be executed bilaterally.
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    \22\ The requirements for SEFs are set forth in new CEA section 
5h.
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    Section 731 of the Dodd-Frank Act adds a new section 4s to the CEA 
that provides for the registration and regulation of swap dealers and 
major swap participants.\23\ The new requirements for swap dealers and 
major swap participants include, in part, capital and margin 
requirements, business conduct standards, and reporting, recordkeeping, 
and documentation requirements.
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    \23\ ``Swap dealer'' is defined in new CEA section 1a(49), as 
added by section 721(a)(21) of the Dodd-Frank Act. ``Major swap 
participant'' is defined in new CEA section 1a(33), as added by 
section 721(a)(16) of the Dodd-Frank Act.
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    Section 737 of the Dodd-Frank Act amends current CEA section 4a 
regarding position limits. Under the Dodd-Frank provisions and amended 
CEA section 4a, the Commission is directed to establish position limits 
as appropriate for futures and options traded on or subject to the 
rules of a designated contract market, and swaps that are economically 
equivalent to such futures and exchange-traded options for both exempt 
and agricultural commodities.
ii. Agricultural Swaps
    Notwithstanding the new swaps regime in the Dodd-Frank Act, section 
723(c)(3) of Dodd-Frank prohibits swaps in an ``agricultural 
commodity'' (as defined by the Commission) \24\ unless the swap is 
entered into pursuant to an exemption granted under CEA section 4(c). 
The requirements of section 4(c) are discussed in greater detail, 
below.\25\
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    \24\ See the recently adopted definition of agricultural 
commodity at 76 FR 41048, July 13, 2011.
    \25\ Generally speaking, section 4(c) provides that, in order to 
grant an exemption, the Commission must determine that: (1) The 
exemption would be consistent with the public interest and the 
purposes of the CEA; (2) any agreement, contract, or transaction 
affected by the exemption would be entered into by ``appropriate 
persons'' as defined in section 4(c); and (3) any agreement, 
contract, or transaction affected by the exemption would not have a 
material adverse effect on the ability of the Commission or any 
contract market to discharge its regulatory or self-regulatory 
duties under the CEA.
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    Dodd-Frank section 723(c)(3)(B) includes a ``grandfather'' clause 
providing that any rule, regulation, or order regarding agricultural 
swaps that was issued pursuant to the Commission's section 4(c) 
exemptive authority, and that was in effect on the date of enactment of 
the Dodd-Frank Act, would continue to be permitted under such terms and 
conditions as the Commission may prescribe. Such rules, regulations or 
orders include part 35 with respect to agricultural swaps and the 
agricultural basis and calendar swaps noted above.
    In addition to the provisions in section 723(c)(3), section 733 of 
the Dodd-Frank Act, new CEA section 5h(b), provides that a SEF 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.

III. Agricultural Swaps Proposal in the NPRM

    The NPRM proposed repealing existing part 35 in its entirety and 
replacing it with the following:

PART 35--SWAPS IN AN AGRICULTURAL COMMODITY (AGRICULTURAL SWAPS)


Sec.  35.1  Agricultural swaps, generally.

    (a) Any person or group of persons may offer to enter into, enter 
into, confirm the execution of, maintain a position in, or otherwise 
conduct activity related to, any transaction in interstate commerce 
that is a swap in an agricultural commodity subject to all provisions 
of the Act, including any Commission rule, regulation, or order 
thereunder, otherwise applicable to any other swap; and
    (b) In addition to paragraph (a) of this section, any transaction 
in interstate commerce that is a swap in an agricultural commodity may 
be transacted on a swap execution facility, designated contract market, 
or otherwise in accordance with all provisions of the Act, including 
any Commission rule, regulation, or order thereunder, applicable to any 
other swap eligible to be transacted on a swap execution facility, 
designated contract market, or otherwise.


In the NPRM, the Commission requested specific input on the following 
questions related to the agricultural swaps proposal:
    1. Generally, would the proposed rulemaking provide an appropriate 
regulatory framework for the transacting of agricultural swaps?
    2. Does the proposal for new part 35 appropriately address all 
outstanding issues as they relate to the transaction of swaps in an 
agricultural commodity?
    3. By limiting participation in agricultural swaps that are 
transacted outside of a DCM to persons that meet the CEA definition of 
an eligible

[[Page 49294]]

contract participant and permitting non-ECPs to enter into a swap on a 
DCM, has the proposed rulemaking satisfied the requirements of CEA 
section 4(c)(3), which requires that any agreements, contracts or 
transactions exempted under this provision should be limited to those 
``entered into solely between appropriate persons?''
    4. Do the proposals omit or fail to appropriately consider any 
other areas of concern regarding agricultural swaps?

IV. Summary of Comments

A. General Overview

    Thirty-one formal comment letters substantively addressed the 
NPRM,\26\ representing a broad range of interests, including 
agricultural producers, merchants, swap dealers, commodity funds, 
futures industry organizations, academics/think tanks, a US government 
agency, and private individuals. The comments addressing the 
agricultural swaps proposal came from Gavilon Group, LLC (``Gavilon''), 
a feed manufacturer; the Agricultural Commodity Swaps Working Group (a/
k/a ``Commodity Options and Agricultural Swaps Working Group''), which 
is comprised of financial institutions, including Barclays Capital, 
Citigroup, Credit Suisse Securities (USA) LLC, JPMorgan Chase & Co., 
Morgan Stanley, and Wells Fargo & Company, that provide risk management 
and investment products to agricultural end-users; Chris Barnard, an 
individual; Dairy Farmers of America (``DFA''); the Independent Bakers 
Association, which represents over 200 small to medium sized, mostly 
family owned wholesale bakeries and allied industry trades; NextEra 
Energy Resources, LLC, owners of electricity generation assets; CME 
Group, Inc. (``CME''); Futures Industry Association and International 
Swaps and Derivatives Association (``FIA & ISDA''); National Grain and 
Feed Association (``NGFA''); Professor Michael Greenberger, University 
of Maryland School of Law, referencing his comment letter submitted for 
the agricultural commodity definition notice of proposed rulemaking; 
National Council of Farmer Cooperatives (``NCFC''); Commodity Markets 
Council (``CMC''), a trade association made up of U.S. futures 
exchanges and commercial end-users of futures and derivatives markets; 
and National Milk Producers Federation (``NMPF''). In addition, the 
NPRM received several comments that only addressed options,\27\ and 
several comments requesting exemptive relief for the transition period 
following the effective date of the Dodd-Frank Act.\28\
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    \26\ The public comment file for the NPRM is available at: 
https://comments.cftc.gov/PublicComments/CommentList.aspx?id=968. 
This summary references each of the comments that substantively 
addressed the NPRM, whether submitted in response to the original 
NPRM or in response to the re-opened comment period. See Reopening 
and Extension of Comment Periods for Rulemakings Implementing the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR 
25274, May 4, 2011 (this is the Commission's Federal Register 
release that extended the comment deadline for multiple Dodd-Frank 
rulemakings to June 3, 2011). Only those comments submitted in 
response to 76 FR 25274 that specifically addressed the agricultural 
swaps proposal are included in this summary. In addition, the 
comment file for the NPRM also included multiple comments that did 
not directly address the Commodity Options and Agricultural Swaps 
NPRM (for example, see the comments from Majed El Zein, B.J. 
D'Milli, Maryknoll Office for Global Concerns, Maryknoll Fathers and 
Brothers, J.C. Hoyt, and Jon Pike). Of these, several addressed 
other proposed Commission rulemakings, and those comments are being 
considered in conjunction with the other rulemakings.
    \27\ See, e.g., comments from The Financial Services Roundtable, 
which represents 100 of the largest integrated financial services 
companies in the United States; Edison Electric Institute and 
Electric Power Supply Association; Federal Energy Regulatory 
Commission; American Public Gas Association (``APGA''), which 
represents publicly-owned natural gas distribution systems; Air 
Transport Association of America (``ATA''); Amcot, an association of 
U.S. cotton marketing cooperatives; Coalition of Physical Energy 
Companies, an association of businesses that produce, process, and 
merchandize energy commodities at retail and wholesale levels; 
National Rural Electric Cooperative Association, American Public 
Power Association, and Large Public Power Council, all representing 
U.S. not-for-profit consumer-owned electric utilities in a joint 
letter; Working Group of Commercial Energy Firms, a group of 
unspecified firms which indicated that their primary business is the 
physical delivery of energy commodities to industrial, commercial 
and residential consumers; and Hess Corporation.
    \28\ See, e.g., comments filed on the Commission's Federal 
register release that re-opened the comment period (76 FR 25274, May 
4, 2011) from the Commodity Options and Agricultural Swaps Working 
Group; INTL FCStone Inc.; NEW Cooperative Inc.; NGFA; NCFC; and 
Innovative Ag Services Co.
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B. Comments on the Agricultural Swaps Proposal

    Just as with the comments received on the ANPRM, the vast majority 
of commenters who expressed an opinion on the topic supported treating 
agricultural swaps under the same regulatory scheme as other categories 
of swaps, as the Commission proposed. The following statements are 
representative of this sentiment:

    The use of agricultural swaps has been constrained relative to 
other swaps by virtue of being subject to CFTC regulatory 
requirements, while other swaps have been exempted from CFTC 
oversight. As the Commission's proposed rule notes, the passage of 
the Dodd-Frank Act changes the regulatory structure for all swaps 
and institutes a number of safeguards, including the limitation that 
only eligible contract participants (ECPs) may engage in swaps 
unless entered into on a designated contract market; mandatory 
clearing requirements for swaps; and registration, reporting, 
business standards, and capital and margining requirements for swap 
dealers and major swap participants. The NGFA believes that these 
safeguards provide more-than-ample protection in the swaps 
marketplace for both agricultural and non-agricultural swaps and 
that there is no compelling reason to place additional burdens on 
agricultural swaps.'' NGFA letter at 2.
    In our view, applying a single, uniform set of rules to all 
swaps will advance the public interests that Dodd-Frank and the CEA 
are designed to promote and benefit the users of these products.'' 
CME letter at 1.
    We are pleased that, if enacted, the [NPRM] would revise 
existing CFTC regulations in order to treat agricultural commodity 
swaps as ``swaps,'' subjecting them to the same regulatory regime as 
all other commodity swap transactions under Dodd-Frank.'' FIA & ISDA 
letter at 2.
    NCFC believes the changes and amendments in the proposed rule 
will provide an appropriate regulatory framework for the transacting 
of agricultural swaps. NCFC letter at 1.


Similar sentiments were expressed by Gavilon, Amcot, CMC, the Commodity 
Options and Agricultural Swaps Working Group, and Barnard.
    One comment, from the National Milk Producers Foundation (NMPF), 
suggested that the Commission use its CEA section 4(c) authority to 
provide a broad-based exemption exclusively tailored for agricultural 
swaps transactions by certain agricultural end-users to transact 
outside of much of the Dodd-Frank swaps regime. The Commission believes 
that the logical place to address end-user concerns, such as those 
raised by the NMPF comment, is in the participant definitions and the 
end-user rules, which are yet to be finalized. The NMPF comment letter 
has been included in the record for those rulemakings. Addressing the 
concerns of end-users generally, rather than creating special rules for 
agricultural end-users, is consistent with the Commission's proposed 
approach to treat agricultural swaps the same as all other swaps.

C. Comments Regarding Whether the Agricultural Swaps Proposal Satisfies 
the CEA Section 4(c) Requirements

    Commenters generally expressed the opinion that the proposal to 
allow agricultural swaps to be treated the same as other commodity 
swaps meets the requirements of Section 4(c)(2) of the CEA.\29\ CME 
noted the robust

[[Page 49295]]

regulatory regime introduced for the trading of all swaps under the 
Dodd-Frank Act and stated that ``permitting agricultural swaps to 
transact under the same terms and conditions as other swaps will 
provide greater certainty and stability to the agricultural swaps 
market and will advance many of Dodd-Frank's goals, including increased 
pre-trade price transparency, and the reduction of systemic risk 
through the use of central counterparty clearinghouses.'' Commenters 
also believed that the proposal would satisfy the Section 4(c)(2) 
requirement that transactions subject to this exemption would only be 
entered into by appropriate persons. In this regard, CME noted that 
``Under Dodd-Frank, only market participants that qualify as eligible 
contract participants (`ECPs') may trade swaps in the OTC market. All 
other market participants must trade swaps on, or subject to the rules 
of, a DCM, where they will have the full protections that all DCM users 
enjoy * * * these provisions should limit participation in agricultural 
swaps to appropriate persons.'' Similar sentiments were expressed by 
Gavilon, FIA & ISDA, NCFC, and the Commodity Options and Agricultural 
Swaps Working Group.
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    \29\ CEA section 4(c)(2) requires the CFTC to determine, prior 
to granting a 4(c) exemption, that (1) Such exemption is consistent 
with the public interest and purposes of the CEA, and (2) the 
exempted agreement, contract, or transaction will be entered into 
solely by appropriate persons and will not have a material adverse 
effect on the ability of the Commission or a contract market to 
discharge its regulatory or self-regulatory duties under the CEA.
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    One commenter (Professor Greenberger) was generally opposed to the 
trading of agricultural swaps under the same conditions as other 
physical commodity swaps. This commenter expressed the belief that 
speculative investment in agricultural derivatives ``is 
incontrovertibly a main driving force of rising commodity prices and 
price volatility,'' and that such price instability harms agricultural 
producers. He believes that Congress specifically intended for the CFTC 
to provide special protections to agricultural producers in trading 
swaps and that the rulemaking runs counter to Congress' intent by 
providing for equal treatment of agricultural swaps and all other 
commodity swaps. However, Professor Greenberger did not offer an 
alternative approach, and the Commission does not find further 
reasoning to support treating agricultural swaps in a manner different 
than any other swap.

D. Comments on the Treatment of Commodity Options

    As noted above, the options issues raised in the NPRM received 
multiple substantive comments, which will be addressed by the 
Commission at a later date.

E. Issues Outside the Scope of the Proposed Rulemaking

    Although recognizing that their comments were outside the scope of 
the subject rulemaking, several commenters requested that the 
Commission provide clarity regarding the treatment of certain types of 
swap participants and transactions within the overall regulatory scheme 
for swaps. In this regard, several commenters requested that the 
Commission clarify that agricultural producer cooperatives that enter 
into swaps with their own members or third parties in the course of 
marketing their members' agricultural products should be considered to 
be end-users for purposes of the Dodd-Frank clearing exception, and 
further that the Commission should clarify that producer cooperatives 
are excluded from the definitions of swap dealer and major swap 
participant (see, for example, comments from NGFA, NCFC, and DFA). The 
Commission has issued proposed rules regarding: (1) The end-user 
exception to mandatory clearing of swaps pursuant to Sec.  723 of the 
Dodd-Frank Act; \30\ and (2) further definition of certain terms 
regarding market participants, including the terms ``swap dealer'' and 
``major swap participant,'' pursuant to Sec.  712(d) of the Dodd-Frank 
Act.\31\ Accordingly, the Commission is considering those comments in 
the context of drafting the end-user exception and the participant 
definitions rules.
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    \30\ See End-User Exception to Mandatory Clearing of Swaps, 75 
FR 80747, Dec. 23, 2010 (comment period closed June 3, 2011).
    \31\ See Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-Based 
Swap Participant'' and ``Eligible Contract Participant,'' 75 FR 
80174, Dec. 21, 2010 (joint rulemaking with Securities and Exchange 
Commission (``SEC''), comment period closed June 3, 2011).
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    CMC also requested that the Commission clarify that certain types 
of transactions (embedded options in forward contracts \32\ and book-
outs \33\) fall within the definition of an excluded forward contract 
rather than the definition of a swap. Similarly, Amcot requested 
clarification that ``equity trades'' or ``options to redeem'' cotton 
from the U.S. Department of Agriculture's Commodity Credit Corporation 
marketing loan program would not be considered swaps. The Working Group 
of Commercial Energy Firms provided several examples of ``transactions 
that energy market participants do not historically consider options, 
but nonetheless contain an element of optionality * * * and should not 
be regulated as swaps.'' These include daily natural gas calls, 
wholesale full requirements contracts for power, tolling agreements in 
organized wholesale electricity markets, physical daily heat rate call 
options, and capacity contracts. APGA and ATA requested that the 
Commission clarify that certain variable amount delivery contracts that 
are common in the energy sector be excluded from the definition of a 
swap. Where applicable, those comments are being considered by the 
Commission, jointly with the SEC, in considering further definitions of 
terms regarding certain products, including the term ``swap,'' pursuant 
to Sec.  712(d) of the Dodd-Frank Act.\34\
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    \32\ See Characteristics Distinguishing Cash and Forward 
Contracts and ``Trade'' Options, Interpretive Statement of the 
Commission's General Counsel, 50 FR 39656, Sept. 30, 1985, regarding 
the differences between forward contracts and options.
    \33\ A book-out is a separate, subsequent agreement whereby two 
commercial parties to a forward contract, who find themselves in a 
delivery chain or circle at the same delivery point, can agree to 
settle (or ``book-out'') their delivery obligations by exchanging a 
net payment. See Statutory Interpretation Regarding Forward 
Transactions, 55 FR 39188, Sept. 25, 1990.
    \34\ See footnote 31, above.
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V. Explanation of the Final Rules for Swaps in an Agricultural 
Commodity

A. Introduction

    After considering the complete record in this matter, including all 
comments on both the ANPRM and NPRM, the Commission is adopting the 
revisions to part 35 as proposed. Broadly speaking, the new rules will 
implement regulations whereby swaps in agricultural commodities may 
transact subject to the same rules as all other swaps.
    Specifically, the final rules adopted herein will operate to 
withdraw existing part 35 of the Commission's regulations--thus 
withdrawing the provisions originally adopted in 1993 to provide legal 
certainty for the bilateral swaps market by largely exempting bilateral 
swaps meeting the part 35 conditions from CEA regulation.\35\ In its 
place, pursuant to the exemptive authority in CEA section 4(c) and the 
Commission's authority in CEA section 4c(b),\36\ these final rules 
adopt a new

[[Page 49296]]

part 35 to provide the primary authority for transacting swaps in an 
agricultural commodity as authorized by sections 723(c)(3) and 733 of 
the Dodd-Frank Act.
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    \35\ ``[Part 35 * * *] exempt[s] swap agreements (as defined 
herein) meeting specified criteria from regulation under the 
Commodity Exchange Act (the ``Act''). This rule was proposed 
pursuant to authority recently granted the Commission, a purpose of 
which is to give the Commission a means of improving the legal 
certainty of the market for swaps agreements.'' 58 FR 5587, Jan. 22, 
1993.
    \36\ Recall that original part 35 was adopted pursuant to CEA 
sections 4(c) and 4c(b). The Commission is clarifying now that the 
new part 35, which will apply only to swaps in agricultural 
commodities, is similarly adopted pursuant to the authorities found 
in CEA sections 4(c) and 4c(b).
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B. Withdrawal of Current Part 35

    In enacting the Futures Trading Practices Act of 1992 (the ``1992 
Act''),\37\ Congress added section 4(c) to the CEA and authorized the 
Commission, by rule, regulation, or order, to exempt any agreement, 
contract or transaction, or class thereof, from the exchange-trading 
requirement of CEA section 4(a), or (with minor exceptions not relevant 
here) from any other provision of the Act.\38\ Pursuant to its new 
authority in section 4(c),\39\ the Commission proposed in 1992 \40\ and 
adopted in 1993 \41\ part 35 of the Commission's regulations, generally 
exempting certain swap agreements from the CEA. As explained above, 
part 35 originally applied to all commodities--that is, exempt, 
excluded, and agricultural commodities. However, certain amendments to 
the CEA made by the CFMA had the effect of making part 35 relevant only 
for swaps in agricultural commodities.
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    \37\ Public Law 102-546 (Oct. 28, 1992).
    \38\ While section 4(c) was amended by the Dodd-Frank Act, for 
the purposes of this rulemaking its function and effect have not 
changed. See 4(c) discussion, below.
    \39\ As noted above, original part 35 was also adopted pursuant 
to the Commission's authority in CEA section 4c(b).
    \40\ See the original proposal at 57 FR 53627, Nov. 12, 1992. 
See also 57 FR 58423, Dec. 28, 1992, extending the comment period 
for an additional fourteen days.
    \41\ 58 FR 5587, Jan. 22, 1993.
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    The Dodd-Frank Act amends, repeals, or replaces many CEA sections 
added by the CFMA (including repealing the statutory exemptions for 
swaps in excluded and exempt commodities at pre Dodd-Frank CEA sections 
2(d), 2(g), and 2(h)). To avoid any uncertainty as to whether the 
Commission will allow bilateral swaps in non-agricultural commodities 
to revert to reliance on existing part 35 for exemption from the CEA 
and the Dodd-Frank amendments, the Commission is now repealing and 
replacing current part 35 in its entirety.

C. New Part 35

    The provisions of new part 35, as proposed in the NPRM and as 
adopted herein, generally provide that agricultural swaps may be 
transacted subject to all provisions of the CEA, and any Commission 
rule, regulation or order thereunder, that is otherwise applicable to 
swaps. New part 35 also clarifies that by issuing a rule allowing 
agricultural swaps to transact subject to the laws and rules applicable 
to all other swaps, the Commission is allowing agricultural swaps to 
transact on DCMs, SEFs, or otherwise to the same extent that all other 
swaps are allowed to trade on DCMs, SEFs, or otherwise.

D. Effective Date

    The repeal of original part 35 and the rules in new part 35 shall 
become effective on December 31, 2011. This will coincide with the 
expiration of the 4(c) transition relief promulgated by the Commission 
to accommodate the phasing in of the Dodd-Frank swaps rules.\42\
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    \42\ See Effective Date for Swap Regulation, 76 FR 42508, July 
19, 2011 (effective July 14, 2011). As noted by the Commission in 
the transition relief, existing part 35 remains available until part 
35 is repealed or replaced.
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VI. Findings Pursuant to Section 4(c)

    As noted above, section 723(c)(3)(A) of the Dodd-Frank Act 
prohibits swaps in an agricultural commodity. However, section 
723(c)(3)(B) of the Dodd-Frank Act explicitly provides that the 
Commission may permit swaps in an agricultural commodity pursuant to 
CEA section 4(c), the Commission's general exemptive authority, ``under 
such terms and conditions as the Commission shall prescribe.'' 
Accordingly, the amendments to part 35 adopted herein are adopted 
pursuant to CEA section 4(c), as amended by the Dodd-Frank Act.\43\
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    \43\ In addition to 4(c), these final rules are also being 
adopted pursuant to the Commission's authority under CEA section 
4c(b)--just as original part 35 was adopted pursuant to both CEA 
section 4(c) and 4c(b).
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    Section 4(c)(1) of the CEA authorizes the CFTC to exempt any 
transaction or class of transactions from any of the provisions of the 
CEA (subject to exceptions not relevant here) in order to ``promote 
responsible economic or financial innovation and fair competition.'' 
\44\ The Commission may grant such an exemption by rule, regulation, or 
order, after notice and opportunity for hearing, and may do so on 
application of any person or on its own initiative. In enacting section 
4(c), Congress noted that the goal of the provision ``is to give the 
Commission a means of providing certainty and stability to existing and 
emerging markets so that financial innovation and market development 
can proceed in an effective and competitive manner.'' \45\
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    \44\ New section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), as 
amended by the Dodd-Frank Act, provides in full that:
     In order to promote responsible economic or financial 
innovation and fair competition, the Commission by rule, regulation, 
or order, after notice and opportunity for hearing, may (on its own 
initiative or on application of any person, including any board of 
trade designated or registered as a contract market or derivatives 
transaction execution facility for transactions for future delivery 
in any commodity under section 5 of this Act) exempt any agreement, 
contract, or transaction (or class thereof) that is otherwise 
subject to subsection (a) (including any person or class of persons 
offering, entering into, rendering advice or rendering other 
services with respect to, the agreement, contract, or transaction), 
either unconditionally or on stated terms or conditions or for 
stated periods and either retroactively or prospectively, or both, 
from any of the requirements of subsection (a), or from any other 
provision of this Act (except subparagraphs (C)(ii) and (D) of 
section 2(a)(1), except that--
    (A) Unless the Commission is expressly authorized by any 
provision described in this subparagraph to grant exemptions, with 
respect to amendments made by subtitle A of the Wall Street 
Transparency and Accountability Act of 2010--
    (i) With respect to--
    (I) Paragraphs (2), (3), (4), (5), and (7), paragraph 
(18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), (39), 
(41), (42), (46), (47), (48), and (49) of section 1a, and sections 
2(a)(13), (2)(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d), 4r, 4s, 5b(a), 
5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 8e, and 21; and
    (II) Section 206(e) of the Gramm-Leach-Bliley Act (Pub. L. 106-
102; 15 U.S.C. 78c note); and
    (ii) In sections 721(c) and 742 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act; and
    (B) The Commission and the Securities and Exchange Commission 
may by rule, regulation, or order jointly exclude any agreement, 
contract, or transaction from section 2(a)(1)(D) if the Commissions 
determine that the exemption would be consistent with the public 
interest.
    \45\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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    In order to analyze the effect of permitting agricultural swaps to 
trade under the same terms and conditions as other swaps, it is 
appropriate to examine some of the major components of the Dodd-Frank 
Act that apply to swaps generally. The Commission originally performed 
this review in the NPRM, and repeats the analysis here for convenient 
reference: Section 727 of the Dodd-Frank Act adds, among other things, 
a new CEA section 2(a)(13) that mandates that swap transaction and 
pricing data be made available to the public. Section 723(a)(3) of the 
Dodd-Frank Act adds a new CEA section 2(h) that provides that the 
Commission shall determine which swaps are subject to a mandatory 
clearing requirement. New CEA section 2(h) also provides that swaps 
that are required to be cleared must be executed on a DCM or SEF, if a 
DCM or SEF makes the swap available for trading. As noted above, part 
35, as it is currently written, does not permit clearing of 
agricultural swaps and does not contemplate any reporting of 
agricultural swaps data.
    Permitting agricultural swaps to trade under the same terms and 
conditions as other swaps should provide greater certainty and 
stability to existing and

[[Page 49297]]

emerging markets so that financial innovation and market development 
can proceed in an effective and competitive manner. Treating all swaps, 
including agricultural swaps, in a consistent manner should provide 
greater certainty to markets. The Dodd-Frank Act reporting and trade 
execution requirements should lead to greater market and price 
transparency, which may improve market competition, innovation, and 
development. Centralized clearing of agricultural swaps by robustly 
regulated central clearinghouses should reduce systemic risk and 
provide greater certainty and stability to markets by reducing 
counterparty risk.
    As noted above, the NPRM requested comment on whether swaps in 
agricultural commodities should be subject to the same legal 
requirements as swaps in other commodities. The overwhelming majority 
of those comments, as summarized above, did in fact support treating 
agricultural swaps the same as every other swap. Further, no commenter 
offered a persuasive argument for treating agricultural swaps 
differently than other swaps under the Dodd-Frank Act. Thus, no 
commenter demonstrated that the proposal to treat agricultural swaps 
the same as every other swap failed to ``promote responsible economic 
or financial innovation and fair competition.''
    Section 4(c)(2) of the CEA provides that the Commission may grant 
exemptions only when it determines that the requirements for which an 
exemption is being provided should not be applied to the agreements, 
contracts or transactions at issue; that the exemption is consistent 
with the public interest and the purposes of the CEA; that the 
agreements, contracts or transactions will be entered into solely 
between appropriate persons; and that the exemption will not have a 
material adverse effect on the ability of the Commission or Commission-
regulated markets to discharge their regulatory or self-regulatory 
responsibilities under the CEA.\46\
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    \46\ Section 4(c)(2) of the CEA, 7 U.S.C. 6(c)(2), provides in 
full that:
    The Commission shall not grant any exemption under paragraph (1) 
from any of the requirements of subsection (a) of this section 
unless the Commission determines that--
    (A) The requirement should not be applied to the agreement, 
contract, or transaction for which the exemption is sought and that 
the exemption would be consistent with the public interest and the 
purposes of this Act; and
    (B) The agreement, contract, or transaction--
    (i) Will be entered into solely between appropriate persons; and
    (ii) Will not have a material adverse effect on the ability of 
the Commission or any contract market or derivatives transaction 
execution facility to discharge its regulatory or self-regulatory 
duties under this Act.
---------------------------------------------------------------------------

    The purposes of the CEA include ``ensur[ing] the financial 
integrity of all transactions subject to this Act and the avoidance of 
systemic risk'' and ``promot[ing] responsible innovation and fair 
competition among boards of trade, other markets and market 
participants.'' \47\ As noted above, centralized clearing of 
agricultural swaps (which is not permitted under the current part 35 
rules) should reduce systemic risk. Also, allowing agricultural swaps 
to trade under the general swaps rules contained in the Dodd-Frank Act 
would allow agricultural swaps to trade on SEFs and DCMs (which is 
prohibited under the current part 35 rules) which may result in 
increased innovation and competition in the agricultural swaps market. 
Reducing systemic risk and increasing innovation and competition by 
permitting agricultural swaps to trade under the same terms and 
conditions as other swaps would be consistent with the purposes listed 
above, the general purposes of the CEA, and the public interest.
---------------------------------------------------------------------------

    \47\ CEA section 3(b), 7 U.S.C. 5(b).
---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act contains substantial new 
clearing and trade execution requirements for swaps. The clearing 
requirement is designed, among other things, to reduce the counterparty 
risk of a swap, and therefore to reduce systemic risk. The swap 
reporting and trade execution requirements should provide additional 
market information to the Commission, the markets, and the public. 
Thus, treating agricultural swaps in the same manner as other swaps may 
enhance the ability of the Commission or Commission-regulated markets 
to discharge their regulatory or self-regulatory responsibilities under 
the CEA.
    Section 4(c)(3) of the CEA includes within the term ``appropriate 
persons'' a number of specified categories of persons, and also in 
subparagraph (K) thereof ``such other persons that the Commission 
determines to be appropriate in light of * * * the applicability of 
appropriate regulatory protections.'' Section 723(a)(2) of the Dodd-
Frank Act adds, among other things, a new CEA section 2(e) that 
provides: ``It shall be unlawful for any person, other than an eligible 
contract participant, to enter into a swap unless the swap is entered 
into on, or subject to the rules of, a [DCM].'' \48\ In light of the 
comprehensive new regulatory scheme for swaps and the enhancements made 
to the already robust regulatory system concerning DCMs \49\ that are 
contained in the Dodd-Frank Act, the limitation on participation to 
eligible contract participants outside of a DCM, and the ability of 
others to enter into a swap on a DCM, should limit participation to 
appropriate persons. The Commission requested comment on its analysis 
of both section 4(c)(2) and section 4(c)(3). As noted in the comment 
summary above, those commenters addressing the question supported the 
Commission's analysis under both 4(c)(2) and 4(c)(3).
---------------------------------------------------------------------------

    \48\ New CEA section 2(e), (7 U.S.C. 2(e)).
    \49\ See, e.g., new CEA section 5(d) (7 U.S.C. 7(d)) as added by 
section 735(b) of the Dodd-Frank Act and amended CEA section 5c (7 
U.S.C. 7a-2) as amended by section 745 of the Dodd-Frank Act.
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VII. Related Matters

A. Cost Benefit Considerations

    Section 15(a) of the CEA \50\ requires the Commission to consider 
the costs and benefits of its actions before issuing a rulemaking under 
the Act. By its terms, section 15(a) does not require the Commission to 
quantify the costs and benefits of the rulemaking or to determine 
whether the benefits of the rulemaking outweigh its costs; rather, it 
requires that the Commission ``consider'' the costs and benefits of its 
actions. Section 15(a) further specifies that the costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness and financial integrity of futures markets; 
(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 and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule is necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or accomplish any of 
the purposes of the Act.
---------------------------------------------------------------------------

    \50\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

i. Summary of Proposed Requirements
    The proposed rule will replace the swaps exemption in part 35 with 
new rules providing, in general, that agricultural swaps would be 
treated the same as all other swaps. As the Commission continues to 
propose and adopt rules implementing the Dodd-Frank Act, any costs 
associated with adhering to the substantive requirements that govern 
swaps generally are and will be addressed in

[[Page 49298]]

those various rulemakings applying to swaps generally. For purposes of 
this discussion, the Commission appropriately considers the costs and 
benefits of treating agricultural swaps as all other swaps are 
treated--as compared to adopting or maintaining a separate regulatory 
regime for agricultural swaps. The Commission has determined that 
treating agricultural swaps the same as other swaps would result in 
lower regulatory cost to both market participants and the Commission, 
because such treatment would eliminate dual regulatory regimes with 
which market participants must comply and the Commission must oversee.
ii. Market and Public Concern
    (1) Protection of market participants and the public. The Dodd-
Frank Act added numerous provisions to the CEA to protect market 
participants and the public, such as the segregation of funds for 
uncleared swaps, swap dealer registration and regulation that includes 
business conduct standards, and limitations on conflicts of interest. 
Current part 35 exempts qualifying swaps from nearly all sections of 
the CEA, so that these and other protections contained in Dodd-Frank 
would not apply to agricultural swaps entered into under part 35. As 
noted by commenters, in contrast to part 35, the new Dodd-Frank Act 
regulatory regime is both robust and comprehensive and will provide 
significant new protections to swap market participants.\51\
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    \51\ ``The NGFA believes that these [Dodd-Frank] safeguards 
provide more-than-ample protection in the swaps marketplace for both 
agricultural and non-agricultural swaps and that there is no 
compelling reason to place additional burdens on agricultural 
swaps.'' NGFA letter at 2. See also the Commodity Options and 
Agricultural Swaps Working Group letters. Also, ``In our view, 
applying a single, uniform set of rules to all swaps will advance 
the public interests that Dodd-Frank and the CEA are designed to 
promote and benefit the users of these products.'' CME letter at 1.
---------------------------------------------------------------------------

    (2) Efficiency, competitiveness, and financial integrity of futures 
markets. Having a single set of regulations governing all swap 
transactions reduces compliance costs for markets and market 
participants, as well as eases the administrative burden on the 
Commission. Commenters agreed with this analysis.\52\ Furthermore, if 
the Commission did not permit agricultural swaps to transact subject to 
the same laws and rules as other commodity swaps, users of agricultural 
swaps that also engage in other types of swaps would be subject to dual 
regulatory regimes. These streamlined regulations may lead to improved 
efficiency, competitiveness and financial integrity of futures markets.
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    \52\ ``[S]treamling swap regulation so that agricultural swaps 
are treated the same as other swaps will enable the Commission and 
Commission-regulated markets to discharge their regulatory duties 
more efficiently.'' CME letter at 2; see also CMC letter and Barnard 
letter.
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    (3) Price discovery. The Dodd-Frank Act contains numerous 
provisions designed to improve price discovery such as the provisions 
encouraging the clearing of swaps and the trading of swaps on DCMs and 
SEFs. For instance, the Dodd-Frank Act mandates that swap transaction 
and pricing data be made available to the public. This reporting and 
the Dodd-Frank trade execution requirements should foster greater 
market and price transparency, and thus better price discovery.
    (4) Sound risk management practices. Several commenters similarly 
noted that agricultural swaps are important risk management tools and 
that such swaps should be available on the same terms and conditions as 
other swaps that are used to manage risk.\53\ In contrast, original 
part 35, by its terms, would not generally allow for swaps that adhered 
to the clearing or trade execution provisions contained in Dodd-Frank.
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    \53\ ``By applying the same regulatory structure and 
requirements to agricultural swaps as to other commodity swaps, the 
[NPRM] will promote legal certainty and an efficient allocation of 
compliance resources. * * * The costs of imposing an alternative 
regulatory structure on this important and well-functioning market 
would substantially outweigh any benefits. It could also make it 
more difficult for agricultural market participants to hedge their 
commercial risks.'' See Commodity Options and Agricultural Swaps 
Working Group 4/11/11 letter at 2-3; see also Gavilon letters.
---------------------------------------------------------------------------

    (5) Other public interest considerations. Treating agricultural 
swaps the same as other swaps would subject those swaps to the numerous 
provisions in the Dodd-Frank Act that protect market participants and 
the public, such as the segregation of funds for uncleared swaps, 
limitations on conflicts of interest, and swap dealer registration and 
regulation that includes business conduct standards.\54\ Moreover, the 
clearing requirement in the Dodd-Frank Act is intended to reduce 
systemic risk which should further protect the public. Thus, concerns 
that are special to agricultural swaps that might have existed under 
the pre Dodd-Frank regulatory regime may be allayed.
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    \54\ ``[A] consistent approach to the regulation of all types of 
commodity swaps would eliminate the need to impose additional 
conditions on agricultural swaps. Equivalent treatment also would 
increase regulatory certainty in commodity markets by allowing 
market participants to structure documentation and compliance 
protocols consistently across commodity desks. Applying many aspects 
of the Dodd-Frank Act to agricultural swaps on an equivalent basis 
as other commodity swaps (e.g., registration, clearing, and 
reporting) also would promote the Commission's stated mission of 
bringing more transparency to the OTC derivatives markets.'' 
Commodity Options and Agricultural Swaps Working Group 10/29/10 
letter at 6.
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iii. Conclusion
    After considering the section 15(a) factors, the Commission has 
determined that the benefits of amended part 35 outweigh the costs.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') 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.\55\ 
The proposed rule, in replacing part 35, would affect eligible swap 
participants (``ESPs'') (by eliminating the ESP category and requiring 
agricultural swap participants to be eligible contract participants 
(``ECPs''), unless the transaction occurs on a designated contract 
market (``DCM'')). By mandating that agricultural swaps