[Federal Register Volume 77, Number 82 (Friday, April 27, 2012)]
[Rules and Regulations]
[Pages 25319-25344]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9888]



[[Page 25319]]

Vol. 77

Friday,

No. 82

April 27, 2012

Part IV





Commodity Futures Trading Commission





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17 CFR Parts 3, 32, and 33





Commodity Options; Final Rule and Interim Final Rule

Federal Register / Vol. 77 , No. 82 / Friday, April 27, 2012 / Rules 
and Regulations

[[Page 25320]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3, 32, and 33

RIN 3038-AD62


Commodity Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule and interim final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is issuing a final rule to repeal and replace the 
Commission's current regulations concerning commodity options. The 
Commission is also issuing an interim final rule (with a request for 
additional comment) that incorporates a trade option exemption into the 
final rules for commodity options (added Sec.  32.3). For a transaction 
to be within the trade option exemption, the option, the offeror 
(seller), and the offeree (buyer), as applicable, must satisfy certain 
eligibility requirements, including that the option, if exercised, be 
physically settled, that the option seller meet certain eligibility 
requirements, and that the option buyer be a commercial user of the 
commodity underlying the option, and certain other regulatory 
conditions. Only comments pertaining to the interim final rule will be 
considered in any further action related to these rules.

DATES: Effective date: The effective date for this final rule and the 
interim final rule June 26, 2012.
    Comment date: Comments on Sec.  32.3, the interim final rule 
portion of this document, must be received on or before June 26, 2012.
    Compliance date: For compliance dates for these final rules, see 
SUPPLEMENTARY INFORMATION at section IV(D), below.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD62, 
by any of the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the CFTC to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the CFTC's regulations.\1\
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    \1\ 17 CFR 145.9.
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    The CFTC reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of this action will be retained in the public comment file 
and will be considered as required under the Administrative Procedure 
Act and other applicable laws, and may be accessible under the Freedom 
of Information Act.

FOR FURTHER INFORMATION CONTACT: Donald Heitman, Senior Special 
Counsel, (202) 418-5041, dheitman@cftc.gov, Division of Market 
Oversight; Ryne Miller, Attorney Advisor, (202) 418-5921, 
rmiller@cftc.gov, Division of Market Oversight; or David Aron, Counsel, 
(202) 418-6621, daron@cftc.gov, Office of the General Counsel, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Dodd-Frank Act
    B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule 
and Interim Final Rule
II. Commodity Options Background
    A. Commission's Plenary Statutory Authority Over Commodity 
Options
    B. The NPRM Proposed an Overhaul of Existing Commodity Options 
Regulations
III. Comments on the Commodity Options Proposal in the NPRM
    A. Request for Comment on the NPRM
    B. Summary of Comments on the NPRM
    1. General Overview
    2. Comments on the Commodity Options Proposal
    a. Whether the Definition of Swap Includes Commodity Options
    b. Trade Option Exemption
    c. Eligible Contract Participants and Trade Options
    d. FERC-Regulated Transactions
    e. Deleting the Dealer Option Provisions
    f. Deleting the Agricultural Trade Option Provisions
    g. Options Fraud Provisions
IV. Explanation of the Final Rule and Interim Final Rule for 
Commodity Options
    A. Introduction
    B. Sections Unchanged From the NPRM
    C. New Part 32
    1. Final Rule
    2. Interim Final Rule; Trade Option Exemption
    a. Exemption From General Swaps Rules
    b. Offeror
    c. Offeree
    d. Physical Commodity Option
    e. Trade Option Exemption Conditions
    i. Recordkeeping Pursuant to Part 45
    ii. Reporting Pursuant to Part 45
    iii. Annual Notice Filing Alternative to Part 45 Reporting; Form 
TO
    iv. Specific Request for Comment on Trade Option Reporting and/
or Notice Filing Requirements
    v. Swaps Large Trader Reporting; Position Limits
    vi. SD/MSP Conditions
    vii. Enforcement Provisions
    viii. General Exemptive Authority Retained
    D. Effective Date; Compliance Date
V. Interim Final Rule Matters
VI. Request for Comment on Interim Final Rule
VII. Related Matters
    A. Cost Benefit Considerations
    1. Background
    2. Statutory Mandate To Consider the Costs and Benefits of the 
Commission's Action: CEA Section15(a)
    3. Benefits and Costs of the Final Rule
    a. Benefits
    b. Costs
    4. Interim Final Rule Benefits and Costs
    a. Benefits
    b. Costs
    c. Costs and Benefits as Compared to Alternatives
    5. Section 15(a) Factors (of the Final Rule and Interim Final 
Rule as a Whole)
    a. Protection of Market Participants and the Public
    b. Efficiency, Competitiveness, and Financial Integrity of the 
Markets
    c. Price Discovery
    d. Sound Risk Management Procedures
    e. Other Public Interest Considerations
    6. Request for Comment on CBC in Connection With Interim Final 
Rule
    B. Regulatory Flexibility Analysis
    1. DCMs, DCOs, FCMs, CPOs, Large Traders, ECPs, and ESPs
    2. SDs, MSPs, SEFs, and SDRs
    3. Entities Eligible To Engage in Options on Physical 
Commodities on DCMs Under Part 33
    4. Entities Engaged in Options Under Sec.  32.13(g)
    5. Entities Engaged in Options Under existing Sec.  32.4
    C. Paperwork Reduction Act
VIII. Final Rule and Interim Final Rule

I. Introduction

A. Dodd-Frank Act

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act

[[Page 25321]]

(``Dodd-Frank Act'').\2\ Title VII of the Dodd-Frank Act \3\ amended 
the Commodity Exchange Act (``CEA'' or ``Act'') \4\ to establish a 
comprehensive new regulatory framework for swaps and security-based 
swaps. The legislation was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial system 
by, among other things: (1) Providing for the registration and 
comprehensive regulation of swap dealers (``SDs'') and major swap 
participants (``MSPs''); (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \2\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the 
Dodd-Frank Act may be accessed at http://www.cftc.gov./
LawRegulation/OTCDERIVATIVES/index.htm.
    \3\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \4\ 7 U.S.C. 1 et seq.
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B. Notice of Proposed Rulemaking--February 3, 2011; Final Rule and 
Interim Final Rule

    Section 721 of the Dodd-Frank Act added new section 1a(47) to the 
CEA, defining ``swap'' to include not only ``any agreement, contract, 
or transaction commonly known as,'' among other things, ``a commodity 
swap,'' \5\ but also ``[an] option of any kind that is for the purchase 
or sale, or based on the value, of 1 or more * * * commodities * * *.'' 
\6\ As a result of the Dodd-Frank changes, on February 3, 2011, the 
Commission published in the Federal Register a notice of proposed 
rulemaking (``NPRM'') that included proposed regulations for commodity 
options.\7\ This final rule and interim final rule relates to the 
commodity options proposal in the NPRM. In particular, the final rule 
issued herein adopts the Commission's proposal to generally permit 
market participants to trade commodity options, which are statutorily 
defined as swaps,\8\ subject to the same rules applicable to every 
other swap. The interim final rule adopted herein includes a trade 
option exemption for physically delivered commodity options purchased 
by commercial users of the commodities underlying the options, subject 
to certain conditions. This final rule and interim final rule also 
renumbers the commodity options rules, as compared to the proposal in 
the NPRM, and deletes a provision from the proposed rules that the 
Commission has determined is no longer relevant.
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    \5\ 7 U.S.C. 1a(47)(A)(iii)(XXII).
    \6\ See 7 U.S.C. 1a(47)(A)(i). Note that the swap definition 
excludes options on futures (which must be traded on a DCM pursuant 
to part 33 of the Commission's regulations) (see CEA section 
1a(47)(B)(i), 7 U.S.C. 1a(47)(B)(i)), but it includes options on 
physical commodities (whether or not traded on a DCM) (see CEA 
section 1a(47)(A)(i), 7 U.S.C. 1a(47)(A)(i)). Other options excluded 
from the statutory definition of swap are options on any security, 
certificate of deposit, or group or index of securities, including 
any interest therein or based on the value thereof, that is subject 
to the Securities Act of 1933 and the Securities Exchange Act of 
1934 (see CEA section 1a(47)(B)(iii), 7 U.S.C. 1a(47)(B)(iii)) and 
foreign currency options entered into on a national securities 
exchange registered pursuant to section 6(a) of the Securities 
Exchange Act of 1934 (see CEA section 1a(47)(B)(iv), 7 U.S.C. 
1a(47)(B)(iv)). Note also that the Commission's regulations define a 
commodity option transaction or commodity option as ``any 
transaction or agreement in interstate commerce which is or is held 
out to be of the character of, or is commonly known to the trade as, 
an `option,' `privilege,' `indemnity,' `bid,' `offer,' `call,' 
`put,' `advance guaranty' or `decline guaranty'.'' 17 CFR 1.3(hh). 
For purposes of this release, the Commission uses the term 
``commodity options'' to apply solely to commodity options not 
excluded from the swap definition set forth in CEA section 
1a(47)(A), 7 U.S.C. 1a(47)(A). As will be discussed in greater 
detail below, the Commission is undertaking a definitions rulemaking 
in conjunction with the Securities and Exchange Commission (``SEC'') 
to further define, among other things, the term ``swap.'' See 
Further Definition of ``Swap,'' ``Security-Based Swap,'' and 
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 
Agreement Recordkeeping, 76 FR 29818, May 23, 2011 (``Product 
Definitions NPRM''). The final rule and interpretations that result 
from the Product Definitions NPRM will address the determination of 
whether a commodity option or a transaction with optionality is 
subject to the swap definition in the first instance. If a commodity 
option or a transaction with optionality is excluded from the scope 
of the swap definition, as further defined by the Commission and the 
SEC, the final rule and/or interim final rule adopted herein are not 
applicable.
    \7\ Commodity Options and Agricultural Swaps, 76 FR 6095, Feb. 
3, 2011. Note that in addition to proposed commodity options rules, 
the NPRM also included proposed rules for agricultural swaps. The 
agricultural swaps rules were adopted by the Commission via a final 
rulemaking published on August 10, 2011 and are not addressed 
herein. See Agricultural Swaps, 76 FR 49291, Aug. 10, 2011 (``Final 
Agricultural Swaps Rules'').
    \8\ See note 6, above.
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    As noted above, because the Dodd-Frank Act definition of swap 
includes commodity options, the NPRM proposed provisions that would 
substantially amend the Commission's regulations regarding such 
commodity option transactions. The proposed rules for commodity 
options, including proposed amendments to parts 3, 32, and 33, 
generally included provisions that would have subjected all commodity 
options that are swaps to the same rules applicable to any other swap. 
After thoroughly reviewing the comments submitted in response to the 
NPRM, the Commission has determined to issue the commodity options 
rules proposed in the NPRM as final rules, with certain non-substantive 
amendments, including the deletion of a ``prompt execution'' 
requirement and other requirements that are no longer relevant, as well 
as minor formatting updates (e.g., renumbering). In addition, and in 
response to the commenters, this final rulemaking also includes an 
interim final rule relating to trade options, as discussed in detail 
below.

II. Commodity Options Background

A. Commission's Plenary Statutory Authority Over Commodity Options

    The CEA provides:

    No person shall offer to enter into, enter into or confirm the 
execution of, any transaction involving any commodity regulated 
under this chapter which is of the character of, or is commonly 
known to the trade as, an ``option'', ``privilege'', ``indemnity'', 
``bid'', ``offer'', ``put'', ``call'', ``advance guaranty'', or 
``decline guaranty'', contrary to any rule, regulation, or order of 
the Commission prohibiting any such transaction or allowing any such 
transaction under such terms and conditions as the Commission shall 
prescribe. Any such order, rule, or regulation may be made only 
after notice and opportunity for hearing, and the Commission may set 
different terms and conditions for different markets.\9\
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    \9\ See CEA section 4c(b), 7 U.S.C. 6c(b).

Through this provision, Congress has given the Commission jurisdiction 
and plenary rulemaking authority over all commodity option 
transactions. Notably, while the Dodd-Frank Act included numerous 
amendments to the CEA, the plenary options authority provision in CEA 
section 4c(b) was not amended or otherwise altered by the Dodd-Frank 
Act. Rather, CEA section 4c(b) has been in the Act in substantially the 
same form since it was added by the Commodity Futures Trading 
Commission Act of 1974.\10\ The Commission has primarily used its 
options authority to promulgate the commodity options rules in parts 32 
(Regulation of Commodity Option Transactions) \11\ and 33 (Regulation 
of Domestic Exchange-Traded Commodity Option Transactions) \12\ of the 
existing regulations, as well as to support the adoption of the swaps 
rules in part 35.\13\
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    \10\ Public Law 93-463, October 23, 1974.
    \11\ 17 CFR part 32.
    \12\ 17 CFR part 33.
    \13\ 17 CFR part 35. CEA section 4c(b) was cited as one of the 
authorizing statutory provisions for original part 35, entitled 
``Exemption of Swap Agreements.'' See Exemption of Swap Agreements, 
58 FR 5587, at 5589, Jan. 22, 1993 (noting that: ``In enacting this 
exemptive rule, the Commission is also acting under its plenary 
authority under section 4c(b) of the Act with respect to swap 
agreements that may be regarded as commodity options.''). In 
addition, when the Commission recently repealed original part 35 and 
replaced it with new part 35, entitled ``Agricultural Swaps,'' CEA 
section 4c(b) was again cited as one of the authorizing statutory 
provisions. See Final Agricultural Swaps Rules, 76 FR at 49295-
49296, n.36, Aug. 10, 2011 (``The Commission is clarifying now that 
the new part 35, which will apply only to swaps in agricultural 
commodities, is similarly adopted pursuant to the authorities found 
in CEA sections 4(c) and 4c(b).'').

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[[Page 25322]]

B. The NPRM Proposed an Overhaul of Existing Commodity Options 
Regulations

    As explained in the introduction, the Dodd-Frank Act includes a 
definition of swap that encompasses commodity options.\14\ The 
Commission proposed the commodity options rules in the NPRM to address 
the fact that the existing rules applicable to commodity options \15\ 
pre-date the Dodd-Frank Act provisions applicable to all other swaps 
and, therefore, do not consider or incorporate such provisions.\16\ 
Therefore, the rules in the NPRM would have amended part 32 to 
essentially permit commodity options to trade subject to the same rules 
applicable to any other swap. The NPRM contains a detailed description 
of the historical development of part 32 and the proposed changes.\17\ 
The NPRM also includes proposed updates to part 33, which currently 
applies to any option traded on a designated contract market (``DCM'') 
(whether an option on a future or an option on a physical). In order to 
place all options that are swaps under a single part of title 17 of the 
Code of Federal Regulations (``CFR''),\18\ the NPRM proposed to remove 
from part 33 any reference to an ``option on a physical,'' \19\ leaving 
part 33 applicable only to exchange-traded options on futures, and 
allowing part 32 to serve as the sole relevant regulation for all other 
commodity options (including both exchange-traded options on physical 
commodities and all off-exchange commodity options). In addition, the 
NPRM proposed repealing the swap exemption in original part 35 and 
replacing it with rules for agricultural swaps pursuant to Dodd-Frank's 
mandate that agricultural swaps only be permitted pursuant to rules set 
by the Commission.\20\
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    \14\ See note 6, above.
    \15\ Those existing rules encompassed primarily parts 32 and 33, 
but also original part 35, which was a general swap exemption 
applicable to, among other things, commodity options that did not 
qualify for the trade option exemption.
    \16\ In some cases, the pre Dodd-Frank commodity options rules 
are inconsistent with certain Dodd-Frank Act provisions, such as the 
lack of a requirement in pre Dodd-Frank Sec.  32.4 (17 CFR 32.4) 
that counterparties to trade options be eligible contract 
participants (``ECPs''). In contrast, section 2(e) of the CEA, 7 
U.S.C. 2(e), as amended by the Dodd-Frank Act, requires that 
counterparties to all swaps not conducted on or subject to the rules 
of a designated contract market be ECPs.
    \17\ See NPRM, 76 FR 6095, at 6097-6098; 6101-6103, Feb. 3, 
2011.
    \18\ The Commission's regulations are set forth in title 17 of 
the CFR.
    \19\ See NPRM, 76 FR at 6103, Feb. 3, 2011.
    \20\ See section 723(c)(3) of the Dodd-Frank Act. As explained 
in note 7, above, the proposals in the NPRM related to part 35 and 
agricultural swaps have already been adopted by the Commission as 
final rules.
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    Under the NPRM, proposed new part 32 would have governed all 
commodity options that fall under the Dodd-Frank swap definition \21\ 
by permitting such commodity options to be transacted subject to the 
same laws and rules applicable to any other swap--without 
distinguishing between trade options and non-trade options. An 
additional element of new part 32, as proposed in the NRPM, was the 
elimination of the historical distinction between the treatment of 
options on the enumerated agricultural commodities and options on all 
other commodities. As proposed in the NPRM, new part 32 would treat 
options on both enumerated and non-enumerated agricultural commodities 
the same as all other commodity options. Finally, the NPRM included, at 
proposed Sec.  32.5, a grandfather clause providing that ``[n]othing 
contained in this part shall be construed to affect any lawful 
activities prior to the effective date of this part.'' That grandfather 
provision is retained unaltered in this final rule.
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    \21\ See note 6, above.
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III. Comments on the Commodity Options Proposal in the NPRM

A. Request for Comment on the NPRM

    In the NPRM, the Commission requested specific input on the 
following questions related to the commodity options proposal:
     Generally, will the rule changes and amendments proposed 
herein provide an appropriate regulatory framework for the transacting 
of trade options on all commodities?
     Regarding the proposed revisions to part 32, and 
specifically the revised Sec.  32.4 trade option exemption, will such 
revisions significantly affect hedging opportunities available to 
currently active users of the trade options market? In other words, is 
there any reason not to revise Sec.  32.4 as proposed? In particular, 
are there persons who offer or purchase trade options on non-enumerated 
agricultural commodities (e.g., coffee, sugar, cocoa) under current 
Sec.  32.4 who would not qualify as ECPs and would therefore be 
ineligible to participate in such options under revised Sec.  32.4? If 
so, should such participants be excepted from the general requirement 
that all swaps participants must be ECPs unless the transaction takes 
place on a DCM?
     Regarding the proposed withdrawal of Sec.  32.12 (the 
dealer option provision) in its entirety, would such action (in 
conjunction with the adoption of the new rules proposed herein) 
prejudice or otherwise harm any person, group of persons, or class of 
transactions? In other words, is there any reason not to withdraw Sec.  
32.12 as proposed?
     Similarly, and regarding the proposed withdrawal of Sec.  
32.13 (the agricultural trade option provision) in its entirety, would 
such action (in conjunction with the adoption of the new rules proposed 
herein) prejudice or otherwise harm any person, group of persons, or 
class of transactions? In other words, is there any reason not to 
withdraw Sec.  32.13 as proposed?
     Do the proposals as they relate to part 33 appropriately 
limit the scope of part 33 to DCM-traded options on futures, leaving 
DCM-traded options on physical commodities subject to part 32?
     Do the proposals outlined herein omit or fail to 
appropriately consider any other areas of concern regarding options in 
any commodity?

B. Summary of Comments on the NPRM

1. General Overview
    Approximately 39 comment letters were submitted that substantively 
addressed the NPRM,\22\ representing a

[[Page 25323]]

broad range of interests, including agricultural producers, merchants, 
SDs, commodity funds, futures industry organizations, academics and 
think tanks, a U.S. government agency, and private individuals. Twenty-
one different commenters, through various letters, specifically 
addressed the commodity options proposal. Commodity options comments on 
the NPRM were filed by entities including: The Financial Services 
Roundtable (``FSR''); CME Group, Inc. (``CME Group'' or ``CME''); 
Futures Industry Association and International Swaps and Derivatives 
Association (``FIA & ISDA''); Edison Electric Institute and Electric 
Power Supply Association (``EIA-EPSA''); National Grain and Feed 
Association (``NGFA''); staff of the Federal Energy Regulatory 
Commission (``FERC Staff''); American Public Gas Association 
(``APGA''); Air Transport Association of America (``ATA''); Amcot; 
Coalition of Physical Energy Companies (``COPE''); Gavilon Group, LLC 
(``Gavilon''), which submitted two letters; a joint letter from 
National Rural Electric Cooperative Association, American Public Power 
Association, and Large Public Power Council (together, the ``Power 
Coalition''); Working Group of Commercial Energy Firms (``Energy 
Working Group''); Commodity Markets Council (``CMC''); Hess Corporation 
(``Hess''); a commodity options and agricultural swaps working group 
that includes Barclays Capital, Citigroup, Credit Suisse Securities 
(USA) LLC, JPMorgan Chase & Co., Morgan Stanley, and Wells Fargo & 
Company (together, ``Commodity Options and Agricultural Swaps Working 
Group''); and American Gas Association (``AGA''). Commodity options 
comments filed on the Product Definitions NPRM included a joint letter 
from Natural Gas Supply Association and National Corn Growers 
Association (``NGSA & NCGA''); a second letter from COPE; a letter from 
Just Energy Group (``Just Energy''); a letter from American Petroleum 
Institute (``API''); a second letter from the Energy Working Group; a 
letter from BG Americas & Global LNG (``BGA''); and a second letter 
from the Power Coalition.
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    \22\ The public comment file for the NPRM is available at: 
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=968. 
This comment summary references each of the comments that 
substantively addressed the commodity options proposal in the NPRM, 
whether submitted in response to the original NPRM, in response to 
the Commission's general reopening of the comment period for 
multiple Dodd-Frank rule proposals (See Reopening and Extension of 
Comment Periods for Rulemakings Implementing the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR 25274, May 4, 2011 
(``Dodd-Frank General Reopening'')), or in response to the joint 
CFTC and SEC Product Definitions NPRM. Note that none of the 
comments submitted in response to Dodd-Frank General Reopening 
specifically addressed the commodity options proposal in the NPRM, 
and so they are not discussed in detail herein. In addition, certain 
comments submitted on this rulemaking may also be addressed by the 
final rule implementing the proposals in the Product Definitions 
NPRM. Finally, the public comment file for the NPRM also includes 
multiple comments that did not directly address the commodity 
options proposal (for example, see the comments from Majed El Zein, 
B.J. D'Milli, Maryknoll Office for Global Concerns, Maryknoll 
Fathers and Brothers, J.C. Hoyt, and Jon Pike), other comments that 
only addressed the proposed agricultural swaps rules, and four 
records of meetings or communications between Commission staff and 
interested industry groups.
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2. Comments on the Commodity Options Proposal
    The commodity options comments generally focused on the following 
substantive areas as they related to the commodity options proposal in 
the NPRM.
a. Whether the Definition of Swap Includes Commodity Options
    Multiple commenters expressed the opinion that treating options as 
swaps, as set forth in the NPRM, was premature and should await the 
Commission's joint rulemaking with the SEC on the further definition of 
a swap.\23\ In particular, FIA-ISDA expressed the opinion that the 
definitions rulemaking ``is the proper place to address whether 
physical commodity options of any kind, including agricultural 
commodity options, should be treated as swaps'' and thus urged the 
Commission to defer the commodity options rulemaking until such time as 
it issues a final rulemaking further defining a swap. See FIA & ISDA at 
4. Similar sentiments were expressed by NextEra, EIA-EPSA, the Power 
Coalition, and the Energy Working Group. For example:
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    \23\ See Product Definitions NPRM, 76 FR 29818, May 23, 2011. 
The Commission notes that, where applicable, the definitions-based 
comments are also being considered in conjunction with its effort, 
jointly with the SEC, to further define certain products, including 
the term ``swap,'' pursuant to Sec.  712(d) of the Dodd-Frank Act.

    As a threshold matter, the Proposed Rule is premature insofar as 
it would treat options on physical commodities as swaps before the 
Commission has even proposed the definition of what constitutes a 
swap pursuant to Section 712(d) of the Dodd-Frank Act . * * * To 
avoid inconsistent outcomes and ensure consideration of an 
integrated and complete record on transactions to be regulated as 
swaps, the Commission should stay this proceeding insofar as it 
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would define commodity options as swaps.

EIA-EPSA at 1-2.

    [T]he Working Group respectfully requests that the Commission 
stay the instant proceeding until such time that the mandatory final 
rule further defining the term `swap' set forth in new Section 
1a(47) of the [CEA] is jointly issued by the Commission and the 
[SEC]. Until the full scope and application of the definition of 
`swap' is known and understood, the Working Group is unable to fully 
evaluate the potential implications of the Proposed Rule, or comment 
meaningfully on how the proposed regulation of Physical Options 
could ultimately affect its members.

Energy Working Group at 2.
    Beyond the requests to delay the commodity options final 
rulemaking, some commenters disagreed with the interpretation that the 
Dodd-Frank swap definition was intended to include all commodity 
options. The following comments illustrate this view:

    Simply put, a commodity option is not a swap * * * COPE requests 
that the Commission find that, unlike swaptions, commodity options 
are not swaps.

COPE at 4-5.

    The text and structure of the Dodd-Frank Act indicates that 
Congress only intended to include options that require financial 
settlement and other financial products in the definition of `swap.'

Gavilon 4/4/11 letter at 4.

    Physical Options meet the criteria of the so-called `forward 
contract exclusion' under section 1a(47)(B)(ii) of the CEA and 
therefore must be excluded from the definition of a `swap' under 
section 1a(47).

NGSA & NCGA letter at 3.\24\ See also, letters from AGA and API.
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    \24\ As discussed below, the NGSA & NCGA letter supported, in 
the alternative, multiple different approaches to their end goal of 
exempting or excluding physically settled commodity options from 
swap regulation.
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    The Energy Working Group acknowledged that the swap definition 
likely included options, but argued that the Commission should take 
action to avoid that result:

    Although Congress included Physical Options in the definition of 
`swap,' it also vested the Commission with the statutory authority 
[referencing CEA section 4c(b)] to regulate options, including 
Physical Options, in a manner different than swaps. The Working 
Group's members consider Physical Options as distinct from other 
`swaps,' and more akin to physically-settled forward contracts, and 
believe that there are substantive policy reasons to treat these 
types of transactions in a similar manner. Regulating Physical 
Options as swaps under Title VII of the Act would have a substantial 
negative effect on not only the market for such options, but also 
more broadly on physical energy markets and participants in such 
markets that rely on physical energy commodities during their normal 
course of business.

Energy Working Group at 4.

    The Energy Working Group letter went on to provide several examples 
of ``transactions that energy market participants do not historically 
consider options, but nonetheless contain an element of optionality * * 
* and should not be regulated as swaps.'' Their letter described 
contracts called daily natural gas calls, wholesale full requirements 
contracts for power, tolling agreements in organized wholesale 
electricity markets, physical daily heat rate call options, and 
capacity contracts. See Energy Working Group at Exhibit A. APGA and ATA 
also requested that the Commission clarify that certain variable amount 
delivery contracts that are common in the energy sector be excluded 
from the definition of a swap. CMC requested that the Commission 
clarify that certain other types of transactions fall within the 
definition of an excluded forward contract rather than the definition 
of a swap. CMC specifically commented that cash

[[Page 25324]]

forward contracts with embedded options and certain cash transaction 
book-outs should not be treated as ``swaps.'' CMC at 1. Amcot requested 
clarification that ``equity trades'' or ``options to redeem'' cotton 
from the U.S. Department of Agriculture's Commodity Credit Corporation 
marketing loan program would not be considered swaps.\25\
---------------------------------------------------------------------------

    \25\ After CFTC staff reviewed the ``options to redeem'' with 
both USDA staff members responsible for managing the cotton 
marketing loan program and industry representatives from Amcot (an 
association of US cotton marketing cooperatives), the Commission has 
concluded that the ``options to redeem'' under USDA's cotton 
marketing loan program constitute the producer's contractual right 
to repay the marketing loan and ``redeem'' the collateral (the 
cotton), to sell in the open market. As such, the ``option'' to 
redeem cotton under USDA Commodity Credit Corporation's marketing 
loan program is a standard loan repayment term and does not 
constitute a commodity option within the meaning of the CEA and CFTC 
regulations.
---------------------------------------------------------------------------

    Regarding those comments describing specific transactions, and in 
particular CMC's comments, the Commission notes that the proposed 
further definition of swap included a discussion of the applicability 
of the swap definition to both forwards with embedded options and book-
out transactions.\26\ The Commission further notes that, in response to 
both the NPRM and the Product Definitions NPRM, several comments were 
submitted regarding ``volumetric options'' in particular (i.e., 
optionality in a contract settling by physical delivery that is used to 
meet varying demand for a commodity). The final further definition of 
the term swap to be issued by the Commission and the SEC will address 
the applicability of the swap definition (and thus, the applicability 
of this final rule and interim final rule) to such volumetric 
options.\27\
---------------------------------------------------------------------------

    \26\ See Product Definition NPRM, 76 FR at 29827-29830, May 23, 
2011.
    \27\ See note 6, above.
---------------------------------------------------------------------------

b. Trade Option Exemption
    While the commodity options rules proposed in the NPRM would have 
removed the trade option exemption that is currently at 17 CFR 
32.4,\28\ the vast majority of commenters who expressed an opinion on 
the topic supported retaining a trade option exemption, in one form or 
another, for options that require physical delivery if exercised, and 
were opposed to treating such options as swaps subject to all 
applicable Dodd-Frank swaps regulatory requirements. The current trade 
option exemption is an exemption from the existing prohibition against 
off-exchange commodity option transactions in 17 CFR 32.11. In 
contrast, the commenters requested a trade option exemption for the 
purpose of being exempt from (1) the swap definition, and/or (2) any 
final rules that would treat commodity options the same as any other 
swap. The following statement from Hess Corporation illustrates this 
view that certain options should not be regulated as swaps:
---------------------------------------------------------------------------

    \28\ Current 17 CFR 32.4(a) provides: ``* * * the [prohibition 
on off-exchange commodity options contained in 17 CFR 32.11] shall 
not apply to a commodity option offered by a person which has a 
reasonable basis to believe that the option is offered to a 
producer, processor, or commercial user of, or a merchant handling, 
the commodity which is the subject of the commodity option 
transaction, or the products or by-products thereof, and that such 
producer, processor, commercial user or merchant is offered or 
enters into the commodity option transaction solely for purposes 
related to its business as such.''

    Treating all options, financial and physical, as swaps will 
result in significant unintended consequences for Hess and other 
commercial entities that rely on physical options to manage their 
business risk. Hess does not believe Congress intended such a 
result. On the contrary, Hess believes that the Dodd-Frank Act 
defines `swap' in a manner that plainly distinguishes between 
financial and physical transactions. Accordingly, Hess urges the 
Commission to regulate options in a similar manner by excluding 
options that are intended to be physically settled once exercised 
---------------------------------------------------------------------------
from the definition of `swap.'

Hess Corporation at 1. Similar sentiments were expressed by the Power 
Coalition, the Energy Working Group, Gavilon, APGA, ATA, NGSA & NCGA, 
AGA, API, and COPE. For example:

    If the Commission proposes rules to discard the `trade option 
exemption,' it should concurrently replace it with a `trade option 
exemption for nonfinancial commodities' to the defined term `swap.'

Power Coalition at 15.

    Gavilon urges the Commission to issue an order pursuant to CEA 
Section 4c(b) that allows commercial entities to enter into Physical 
Options subject only to conditions that are comparable to the 
requirements in current Part 32.4.

Gavilon April 4, 2011 letter at 6-7.

    [R]egulation of Physical Options as `swaps' would cause serious 
harm to the natural gas and other physical commodity markets, 
without providing significant benefits * * *. For these reasons, the 
Commission must recognize, in its final rule, either in the 
definition of a `swap' or by preserving the trade option exemption, 
that Physical Options are excluded, or are eligible for exemption, 
from regulation as swaps.

NGSA & NCGA at 4-5.

    [I]f the Commission determines to move forward with the [Options 
NPRM], it must make clear that no physically settled agreements are 
covered [or] included in any rule pertaining to swaps.

COPE at 5. CME expressed the opinion that ``[We believe that] Congress 
did not necessarily intend for the Commission to treat all options on 
commodities as `swaps' * * * but we have no objection to this 
outcome.'' CME at 3.
c. Eligible Contract Participants and Trade Options
    The energy industry commenters expressed concerns regarding the 
fact that treating commodity options as swaps would require all trade 
options counterparties to be ECPs--because trade options are typically 
bilateral, off-exchange transactions, and CEA section 2(e) permits only 
ECPs to transact swaps other than on or subject to the rules of a DCM. 
The commenters noted that there are many non-ECP market participants 
who currently rely on the trade option exemption for option 
transactions in a wide range of commodities. For example:

    If the Commission eliminates the ability of the NFP Electric End 
Users to engage in energy and energy-related commodity options, or 
conditions the use of such trade options on the NFP Electric End 
Users qualifying as eligible contract participants, it will have a 
significant and detrimental effect on the NFP Electric End Users' 
ability to hedge their commercial risk in a cost effective way.

Power Coalition at 14.

    The Commodity Options NOPR states that, `based on its review [of 
the history of the Commission's development of commodity options 
regulation], the Commission has determined that there would be 
little practical effect and no detrimental consequences in adopting 
the proposed revisions to the existing commodity options regime in 
part 32.' [citing NPRM at 76 FR 6101]. The Coalition disagrees 
strongly with the Commission's determination * * *. We consider the 
Commission's Proposed Rule to be highly detrimental to the NFP 
Electric End Users' ability to provide affordable electric energy to 
American businesses and consumers.

Power Coalition at 16.

    Since, in general, market participants must meet certain net 
worth thresholds to qualify as an `eligible contract participant' 
[footnote omitted] and many Physical Options used by small end users 
are customized or illiquid and thus not traded on exchanges, the 
ability of small end users to transact in Physical Options would be 
limited to on-exchange contracts that do not exist or do not match 
their needs.

NGSA & NCGA at 4.
    Similarly, the FSR pointed out, in a comment primarily addressing 
the proposed definition of ECP,\29\ that there

[[Page 25325]]

may be issues with the fact that the proposal in the NPRM to modify the 
trade option exemption would eliminate the availability of the trade 
option exemption for non-ECPs. See FSR at 26, n.18.
---------------------------------------------------------------------------

    \29\ See: Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant,'' 75 
FR 80174, Dec. 21, 2010 (joint rulemaking with SEC; the comment 
period originally closed on February 22, 2011, and was extended to 
June 3, 2011).
---------------------------------------------------------------------------

d. FERC-Regulated Transactions
    FERC Staff noted that ``depending on how broadly the term `swap' is 
construed, CFTC regulation of swaps could lead to inconsistent 
regulation of participants and transactions subject to FERC 
jurisdiction, and in particular the organized electricity markets.'' 
FERC Staff at 1. The energy and electricity commenters also expressed 
concerns about the jurisdictional overlap. One commenter specifically 
noted that, ``[Physical Options] in the natural gas market are already 
subject to certain regulatory oversight by [FERC] and state public 
utility commissions with respect to price, prudence, and 
manipulation.'' NGSA & NCGA at 5.
e. Deleting the Dealer Option Provisions
    FIA-ISDA supported the proposed withdrawal of regulation 32.12 
(pertaining to the grandfathering of certain dealer options). In 
particular, FIA-ISDA concurred with the Commission's assertion that 
``the dealer option business has not existed since the early 1990s'' 
and thus there is no longer a need for this grandfathering provision. 
See FIA-ISDA at 6.
f. Deleting the Agricultural Trade Option Provisions
    There was only one comment related to eliminating the Agricultural 
Trade Option (ATO) Merchant provisions in part 32. Specifically, NGFA 
supported eliminating the provisions, observing:

    [NGFA] long has believed that an effective ATO regulatory 
structure could benefit agricultural producers and the 
agribusinesses with which they work to develop marketing strategies 
and market their crops. However, the rules in place have been 
unwieldy and, consequently, the ATO merchant registration regime has 
been largely unused * * *. The NGFA believes the redefinition of 
ATOs as swaps, subject to conditions under Dodd-Frank (notably the 
Eligible Contract Participant rules), will result in enhanced 
development and use of products that formerly would have been 
categorized as agricultural trade options and a broader range of 
risk management tools.

NGFA at 2.
g. Options Fraud Provisions
    The proposed rules for commodity options in the NPRM would have 
retained the existing enforcement provisions in part 32, i.e., Sec.  
32.8 (``Unlawful representations; execution of orders'') and Sec.  32.9 
(``Fraud in connection with commodity option transactions''). EEI-EPSA 
requested a modification of Sec.  32.9, regarding fraud in connection 
with commodity option transactions, to include a ``requisite intent'' 
requirement. EEI-EPSA at 11.
    As noted above, in the final rule issued herein, the Commission is 
retaining Sec.  32.9 (``Fraud in connection with commodity option 
transactions''), which has been renumbered as Sec.  32.4, but not 
otherwise changed. The Commission is not including the requisite intent 
standard requested by EEI-EPSA, because it would narrow the scienter 
standard for fraud established by Commission precedent, which is 
``intentionally or with reckless disregard.'' \30\ Moreover, in first 
promulgating its option fraud regulation, the Commission did ``not use 
the concept of willful behavior'' in the regulation text out of concern 
regarding the potential for courts to take a restrictive view of the 
Commission's antifraud authority.\31\ The final rule does not retain 
Sec.  32.8 (``Unlawful representations; execution of orders''). That 
provision was originally intended to apply to the retail over-the-
counter (``OTC'') options market. Such retail OTC options transactions 
have been prohibited since the adoption of the general options 
prohibition at Sec.  32.11 in 1978.\32\ Thus Sec.  32.8 is no longer 
necessary, particularly since the violations listed in Sec.  32.8 are 
either irrelevant (in that they apply to intermediated transactions, 
whereas trade options are generally principal-to-principal 
transactions) or are subsumed by the general antifraud rule, or both.
---------------------------------------------------------------------------

    \30\ See In re Osler, CFTC Docket No. 00-5, 2001 WL 138975 (CFTC 
Feb. 15, 2001) (finding options fraud in violation of regulations 
32.9 and 33.10; ``A person acts with scienter if he acts 
intentionally, or with reckless disregard for his duties under the 
Act.'' (citing Hammond v. Smith Barney Harris Upham & Co., [1987-
1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,617 at 36,659 
(CFTC March 1, 1990)).
    \31\ See Part 30--Fraud in Connection with Commodity 
Transactions, 40 FR 26504, at 26505 and note 2, June 24, 1975 
(adopting final rules in connection with commodity options and 
certain other transactions; ``by adopting rules patterned by 
antifraud provisions that Congress has approved as part of the 
statutory scheme of the Commodity Exchange Act [in section 4b], the 
Commission can fairly expect that the courts will adopt a consistent 
and uniform approach to the prevention of fraudulent and deceptive 
acts and practices under the Commodity Exchange Act'').
    \32\ See Suspension of the Offer and Sale of Commodity Options, 
43 FR 16153, Apr. 17, 1978.
---------------------------------------------------------------------------

IV. Explanation of the Final Rule and Interim Final Rule for Commodity 
Options

A. Introduction

    After considering the complete record in this matter, including all 
comments to the NPRM, the Commission is now adopting and issuing this 
final rule and interim final rule for commodity options. Broadly 
speaking, the final rule would implement the commodity option rules as 
proposed in the NPRM, whereby commodity options are permitted subject 
to the same rules as all other swaps, with additional minor revisions 
to part 32. In addition, the interim final rule includes a new trade 
option exemption from certain swaps regulations.

B. Sections Unchanged From the NPRM

    The final rule as it relates to revisions to part 3 and to part 33 
of the Commission's regulations is the same as in the NPRM.\33\
---------------------------------------------------------------------------

    \33\ For the purposes of part 33, as amended herein, the 
Commission clarifies that an option on a futures contract is an 
option that, upon exercise, results in a futures position.
---------------------------------------------------------------------------

C. New Part 32

1. Final Rule
    The Commission is publishing this final rule in order to provide 
increased regulatory certainty to market participants transacting 
commodity options, along with an interim final rule to permit 
additional public comment on a new trade option exemption. The final 
rule issued herein generally adopts the commodity options proposal as 
set forth in the NPRM. That is, under this final rule, commodity 
options will be permitted to transact subject to the same rules 
applicable to any other swap. This general authorization is necessary 
because the Commission's plenary rulemaking authority over commodity 
options provides that: ``[n]o person shall offer to enter into, enter 
into or confirm the execution of, any transaction involving any 
commodity regulated under this chapter which is [a commodity option 
transaction], contrary to any rule, regulation, or order of the 
Commission prohibiting any such transaction or allowing any such 
transaction under such terms and conditions as the Commission shall 
prescribe.'' \34\ By adopting this final rule, the Commission provides 
the required general authorization for commodity options that are 
subject to the swap

[[Page 25326]]

definition,\35\ and removes any uncertainty as to whether CEA section 
4c(b) would otherwise prohibit such commodity options.
---------------------------------------------------------------------------

    \34\ See CEA section 4c(b).
    \35\ See note 6, above.
---------------------------------------------------------------------------

    The remainder of the final rule (i.e., everything else in new part 
32) largely tracks the commodity options language proposed in the NPRM, 
with a few minor revisions, including formatting and renumbering 
changes. For example, the final rule renumbers the sections of new part 
32 to delete (rather than reserve, as had been proposed in the NPRM) 
the provisions in existing part 32 that are being deleted. A second 
difference is that the proposal in the NRPM would have retained 
existing Sec.  32.8, entitled ``Unlawful representations; execution of 
orders,'' while this final rule deletes that provision, as discussed 
above. Moreover, this commodity options final rule retains the strong 
options antifraud language that was proposed in the NPRM at Sec.  32.9 
(now renumbered as Sec.  32.4).\36\ In addition, the general commodity 
options authorization, proposed as Sec.  32.4 and renumbered herein as 
Sec.  32.2, has been reformatted and updated to include a reference to 
the interim final rule, i.e., the new Sec.  32.3 trade option 
exemption, which is described in detail, below.
---------------------------------------------------------------------------

    \36\ This provision is the same antifraud language used in part 
32 prior to the adoption of this final rule and interim final rule.
---------------------------------------------------------------------------

2. Interim Final Rule; Trade Option Exemption
a. Exemption From General Swaps Rules
    The interim final rule incorporates a new Sec.  32.3 into part 32, 
providing an exemption from certain swaps regulations for trade options 
on exempt and agricultural commodities as between certain commercial 
and sophisticated counterparties. This trade option exemption will 
operate as an alternative to the general commodity options 
authorization in Sec.  32.2. Pursuant to the trade option exemption 
issued as an interim final rule herein, if the offeror,\37\ the 
offeree,\38\ and the characteristics of the option transaction meet the 
requirements of the trade option exemption, such option transaction 
will be exempt from the general Dodd-Frank swaps regime,\39\ subject to 
specified ongoing conditions and compliance requirements discussed 
below, as applicable.
---------------------------------------------------------------------------

    \37\ The offeror, sometimes also called the grantor, is the 
seller of a commodity option.
    \38\ The offeree, sometimes also called the grantee, is the 
buyer of a commodity option.
    \39\ For example: Trade options would not contribute to, or be a 
factor in, the determination of whether a market participant is an 
SD or MSP; trade options would be exempt from the rules on mandatory 
clearing; and trade options would be exempt from the rules related 
to real-time reporting of swaps transactions. The provisions 
identified in this footnote are not intended to constitute an 
exclusive or exhaustive list of the swaps requirements from which 
trade options are exempt.
---------------------------------------------------------------------------

b. Offeror
    Under the terms of the interim final rule, the offeror must fall 
into one of two categories. The offeror may be an ECP, which assures 
that option grantors will have some minimal level of financial 
resources and sophistication in order to minimize the risk that a 
seller would not be able to perform its obligations under a commodity 
option.\40\ Alternatively, the offeror may be a producer, processor, or 
commercial user of, or a merchant handling the commodity which is the 
subject of the commodity option transaction, or the products or by-
products thereof, and be offering or entering into the transaction 
solely for purposes related to its business as such. Because the trade 
option exemption generally is intended to permit parties to hedge or 
otherwise enter into transactions for commercial purposes, and because 
certain commercial parties prefer to transact primarily with other 
commercial parties, the trade option exemption set forth in the interim 
final rule specifically authorizes commercials who may not be ECPs to 
act as trade option offerors. In either instance, the trade option 
offeror may only offer or enter into the contract if it reasonably 
believes, consistent with the standard in the existing trade option 
exemption, that the offeree meets the offeree requirements specified 
below.
---------------------------------------------------------------------------

    \40\ The existing trade option exemption, which the interim 
final rule trade option exemption would replace, includes no 
standards or requirements for option offerors.
---------------------------------------------------------------------------

c. Offeree
    The offeree must meet the same basic requirements as under the 
existing trade option exemption. That is, the option buyer must be a 
producer, processor, or commercial user of, or a merchant handling the 
commodity which is the subject of the commodity option transaction, or 
the products or by-products thereof, and be entering into the 
transaction solely for purposes related to its business as such. Note 
that there is no ECP requirement or other financial eligibility 
standard for the offeree. The purpose of requiring the trade option 
buyer to be a commercial, and of not imposing an ECP or other financial 
eligibility standard, is to ensure that hedging opportunities for 
commercial entities, for physically delivered transactions used for 
purposes related to their business as such, remain available regardless 
of the size or sophistication of the commercial entity.
d. Physical Commodity Option
    The third element of the trade option exemption is that both 
parties must intend that the commodity option be physically settled, so 
that, if exercised, the option would result in the sale of an exempt or 
agricultural (i.e., non-financial) commodity for immediate (spot) \41\ 
or deferred (forward) shipment or delivery. To assist parties in 
determining whether the sale of the exempt or agricultural commodity is 
intended to be physically settled, the Commission refers parties to the 
forward contract exclusion guidance as provided in the Product 
Definition NPRM,\42\ or such other guidance as ultimately may be 
adopted in the final product definition rulemaking. That is, to the 
extent the obligations that remain (or are created) upon the exercise 
of a commodity option are spot transactions or fall within the forward 
contract exclusion from the swap definition, such commodity option is 
eligible for the trade option exemption.
---------------------------------------------------------------------------

    \41\ If not specified by law (see, e.g., CEA section 
2(c)(2)(C)(i)(II)(bb)(AA), 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA)) or 
cash market practice, to be a spot transaction, rather than a 
forward transaction, delivery must occur ``within a reasonable time 
[after the contract is executed] in accordance with prevailing cash 
market practice.'' Regulation of Noncompetitive Transactions 
Executed on or Subject to the Rules of a Contract Market, 63 FR 
3708, 3711, Jan. 26, 1998 (concept release). Delivery under a spot 
contract usually occurs within a few days of the trade date. See 
CFTC Interpretative Letter 98-73, available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/98-73.pdf 
(October 1998), stating that ``[i]n a spot transaction, immediate 
delivery of the product and immediate payment for the products are 
expected on or within a few days of the trade date'' and citing CFTC 
Interpretative Letter No. 97-01, 1996-98 Transfer Binder Comm. Fut. 
L. Rep. (CCH) ] 26,937 at p. 44,520 (December 12, 1996), in turn 
citing Timothy J. Snider, Regulation of the Commodities Futures and 
Options Markets, Vol. 1, Sec.  9.01 (2ed. 1995). However, under cash 
market practices in some markets, delivery can occur more than a few 
days after the trade date. See CFTC, Division of Trade and Markets: 
Report on Exchange of Futures for Physicals 51, 65, 124-147 (1987) 
(noting that under then-prevailing cash market practices, 
transactions in crude oil and sugar called for delivery in 30 and 75 
days, respectively, while foreign currency spot transactions settled 
in 2 days).
    \42\ See Product Definition NPRM, 76 FR at 29827-29830, May 23, 
2011.
---------------------------------------------------------------------------

e. Trade Option Exemption Conditions
    While the trade option exemption issued herein would operate as a 
general exemption from the rules otherwise applicable to other swaps 
(i.e., the Dodd-Frank swaps regime), the trade option exemption is 
subject to certain

[[Page 25327]]

conditions. The conditions are primarily intended to preserve a level 
of market visibility for the Commission while reducing the regulatory 
compliance burden for market participants.
i. Recordkeeping Pursuant to Part 45
    These conditions include a recordkeeping requirement for any trade 
options activity, i.e., the recordkeeping requirements of 17 CFR 
45.2.\43\ Such records must be maintained by all trade option 
participants pursuant to Sec.  45.2 and made available to the 
Commission as specified therein.\44\ Section 45.2 applies different 
recordkeeping requirements, depending on the nature of the 
counterparty. For example, if a trade option counterparty is an SD or 
MSP, it would be subject to the provisions of Sec.  45.2(a). If a 
counterparty is neither an SD nor an MSP, it would be subject to the 
less stringent recordkeeping requirements of Sec.  45.2(b). This 
recordkeeping condition will ensure that trade options market 
participants are able to provide pertinent information regarding their 
trade options activity to the Commission, if requested.
---------------------------------------------------------------------------

    \43\ The Commission recently adopted final swap data 
recordkeeping rules. See Swap Data Recordkeeping and Reporting 
Requirements 77 FR 2136, at 2198, Jan. 13, 2012.
    \44\ 17 CFR 45.2(h) provides that: [a]ll records required to be 
kept pursuant to this section [17 CFR 45.2] by any registrant or its 
affiliates or by any non-SD/MSP counterparty subject to the 
jurisdiction of the Commission shall be open to inspection upon 
request by any representative of the Commission, the United States 
Department of Justice, or the [SEC], or by any representative of a 
prudential regulator as authorized by the Commission. Copies of all 
such records shall be provided, at the expense of the entity or 
person required to keep the record, to any representative of the 
Commission upon request. Copies of records required to be kept by 
any registrant shall be provided either by electronic means, in hard 
copy, or both, as requested by the Commission, with the sole 
exception that copies of records originally created and exclusively 
maintained in paper form may be provided in hard copy only. Copies 
of records required to be kept by any non-SD/MSP counterparty 
subject to the jurisdiction of the Commission that is not a 
Commission registrant shall be provided in the form, whether 
electronic or paper, in which the records are kept.
---------------------------------------------------------------------------

ii. Reporting Pursuant to Part 45
    In addition to part 45 recordkeeping (which applies in some form to 
all trade options and trade option participants), the interim final 
rule requires certain trade options to be reported pursuant to part 
45's reporting provisions. Under the interim final rule, the 
determination as to whether a trade option is required to be reported 
pursuant to part 45 is based on the parties to the trade option and 
whether or not they have previously reported swaps pursuant to part 45. 
Specifically, if any trade option involves at least one counterparty 
(whether as buyer or seller) that has (1) Become obligated to comply 
with the reporting requirements of part 45, (2) as a reporting party, 
(3) during the twelve month period preceding the date on which the 
trade option is entered into, (4) in connection with any non-trade 
option swap trading activity, then such trade option must also be 
reported pursuant to the reporting requirements of part 45. If only one 
counterparty to a trade option has previously complied with the part 45 
reporting provisions, as described above, then that counterparty shall 
be the part 45 reporting entity for the trade option. If both 
counterparties have previously complied with the part 45 reporting 
provisions, as described above, then the part 45 rules for determining 
the reporting party will apply.\45\
---------------------------------------------------------------------------

    \45\ See 17 CFR 45.8.
---------------------------------------------------------------------------

    By applying the part 45 reporting requirements to trade options in 
this manner, the Commission will obtain greater transparency and 
improved oversight of the swaps markets, both of which are primary 
statutory objectives of Title VII of the Dodd-Frank Act. The Commission 
believes, however, that greater transparency regarding the trade 
options market must be balanced against the burdens of frequent and 
near-instantaneous reporting required under part 45 of the Commission's 
regulations on counterparties who are not otherwise obligated to report 
because they do not have other reportable swap activity. Accordingly, 
if neither counterparty to a trade option already is complying with the 
reporting requirements of part 45 as a reporting party in connection 
with its non-trade option swap trading activities as described 
above,\46\ then such trade option is not required to be reported 
pursuant to the reporting requirements of part 45.\47\
---------------------------------------------------------------------------

    \46\ That is, neither counterparty to the trade option has 
previously reported, as the reporting party, non-trade option swap 
trading activity during the twelve months preceding the date on 
which the trade option is entered into.
    \47\ By taking this approach, the Commission ensures that no 
market participant is compelled to comply with part 45's reporting 
requirements based solely on its trade options activity.
---------------------------------------------------------------------------

iii. Annual Notice Filing Alternative to Part 45 Reporting; Form TO
    To the extent that neither counterparty to a trade option has 
previously submitted reports to an SDR as a result of its swap trading 
activities as described above, the Commission recognizes that requiring 
these entities to report trade options to an SDR under part 45 of the 
Commission's regulations solely with respect to their trade options 
activity would be costly and time consuming. As an alternative, the 
interim final rule requires any counterparty to an otherwise unreported 
trade option to submit an annual filing to the Commission for the 
purpose of providing notice that it has entered into one or more 
unreported trade options in the prior calendar year. Unlike with trade 
options subject to the part 45 reporting requirement, wherein only one 
counterparty to the trade option reports the transaction to an SDR, the 
notice filing requirement applies to both counterparties to an 
unreported trade option. Because the purpose of the notice filing 
requirement is to identify to the Commission those market participants 
engaging in unreported trade options, the notice filing requirement 
applies whether or not such counterparty has also been a non-reporting 
counterparty to a reported trade option in the twelve months preceding 
the date on which the unreported trade option was entered into. Market 
participants will satisfy the annual notice filing requirement by 
completing and submitting a new Commission form, Form TO, by March 1 
following the end of any calendar year during which the market 
participant entered into one or more unreported trade options.
    Form TO requires an unreported trade option counterparty to: (1) 
Provide name and contact information, (2) identify the categories of 
commodities (agricultural metals, energy, or other) underlying one or 
more unreported trade options which it entered into during the prior 
calendar year, and (3) for each commodity category, identify the 
approximate aggregate value of the underlying physical commodities that 
it either delivered or received in connection with the exercise of 
unreported trade options during the prior calendar year. For the 
purposes of item (3), a reporting counterparty should not include the 
value of commodities that were the subject of trade options that 
remained open at the end of the calendar year or any trade options that 
expired unexercised during the prior calendar year.
    Pursuant to the interim final rule, Form TO is an annual filing 
requirement. The form must be submitted to the Commission no later than 
March 1 for the prior calendar year. For example, if a market 
participant enters into one or more unreported trade options between 
January 1, 2013 and December 31, 2013 (as will be discussed in the 
effective date and compliance date discussion, below, the first 
calendar year for which a Form TO will be due to the Commission is 
2013), the

[[Page 25328]]

market participant must submit a completed Form TO to the Commission on 
or before March 1, 2014. Form TO is set out in appendix A to part 32 of 
the Commission's regulations and will be available electronically on 
the Commission's Web site at least ninety days before the first 
compliance date for filing of that form, March 1, 2014. The Form TO 
filing requirement will provide the Commission a minimally intrusive 
level of visibility into the unreported trade options market, will 
guide the Commission's efforts to collect additional information 
through its authority to obtain copies of books or records required to 
be kept pursuant to the Act \48\ should market circumstances dictate, 
and will enable the Commission to determine whether these 
counterparties should be subject to more frequent and comprehensive 
reporting obligations in the future.
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    \48\ See 17 CFR 1.31(a)(2) and 17 CFR 45.2(h).
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iv. Specific Request for Comment on Trade Option Reporting and/or 
Notice Filing Requirements
    The Commission is specifically requesting comment on including 
these part 45 recordkeeping and reporting compliance conditions, and 
the Form TO filing requirement for counterparties to unreported trade 
options, in connection with the interim final rule's trade option 
exemption. For example, what are the trade-offs between (1) reducing or 
removing the reporting requirement and/or notice filing requirement 
(and attendant costs) for smaller end-user and commercial entities and 
(2) the Commission's goals of maintaining market visibility and 
eliminating incentives or opportunities to avoid regulation? In their 
comments, market participants should identify alternatives, if any, to 
the part 45 recordkeeping and reporting requirements and/or the Form TO 
filing requirement as applicable to trade options participants. 
Commenters should explain how such alternatives may be able to provide 
the Commission with the equivalent market information and visibility it 
would receive pursuant to the part 45 requirements and/or the Form TO 
filing requirement, as applicable under the interim final rule, while 
lowering the compliance burden on market participants.
v. Swaps Large Trader Reporting; Position Limits
    The interim final rule's trade option exemption also includes 
certain conditions referencing various other swaps rules, which rules 
shall remain applicable to trade options under this interim final rule. 
Specifically, the following conditions, as set forth in interim final 
rule Sec.  32.3(c), would apply to trade options (and trade option 
participants) to the same extent that such conditions would apply to 
any other swap (and swap counterparty): (1) Large trader reporting 
under part 20 (i.e., reporting entities under part 20--SDs and clearing 
members--must consider their counterparty's trade option positions just 
as they would consider any other swap position for the purpose of 
determining whether a particular counterparty has a consolidated 
account with a reportable position, as set forth therein); \49\ and (2) 
position limits under part 151 (to the extent a trade option position 
would otherwise be subject to the position limit rules).\50\
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    \49\ 17 CFR part 20. Note that swap large trader reporting 
obligations apply only to SDs and clearing members. Trade option 
sellers and buyers (unless they fall within one of the part 20 
reporting party categories) would not be responsible for filing 
large trader reports.
    \50\ 17 CFR part 151. Note that position limits apply only to 
speculative positions in those referenced contracts specified in 
part 151. Trade options, which are commonly used as hedging 
instruments or in connection with some commercial function, would 
normally qualify as hedges, exempt from the speculative position 
limit rules.
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vi. SD/MSP Conditions
    In addition, Sec.  32.3(c) provides that certain provisions of 
subpart F and subpart J of part 23, relating to recordkeeping, 
reporting, and risk management duties of SDs and MSPs would apply to 
trade options.\51\ SDs and MSPs participating in trade options will 
also remain subject to CEA section 4s(e), which addresses capital and 
margin requirements for SDs and MSPs. Each of these SD and MSP 
conditions simply confirms that an SD and/or MSP may not avoid certain 
requirements or obligations by structuring its swap transactions as 
trade options. SDs and MSPs may participate in trade options when they 
meet the underlying trade option offeror or offeree eligibility 
requirements, as applicable. But they will remain subject to the SD/MSP 
conditions identified in the interim final rule. As with the part 20 
and part 151 conditions applicable to all trade options and trade 
options participants, the SD/MSP conditions only apply in the context 
of trade options to the extent they would otherwise apply to the 
transaction as any other kind of swap (i.e., as a non-trade option).
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    \51\ Swap Dealer and Major Swap Participant Recordkeeping and 
Reporting, Duties, and Conflicts of Interest Policies and 
Procedures; Futures Commission Merchant and Introducing Broker 
Conflicts of Interest Policies and Procedures; Swap Dealer, Major 
Swap Participant, and Futures Commission Merchant Chief Compliance 
Officer, 77 FR 20128, Apr. 3, 2012. Note that these part 23 
provisions, like the part 20 provisions, would only apply to certain 
large sophisticated entities--in this case, SDs and MSPs.
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vii. Enforcement Provisions
    Finally, at Sec.  32.3(d), the interim final rule also retains for 
trade options the antifraud and anti-manipulation rules under part 
180,\52\ Sec.  23.410,\53\ the specific options antifraud provisions of 
pre-Dodd-Frank Sec.  32.9 (renumbered herein as Sec.  32.4), and any 
other general antifraud, anti-manipulation, and enforcement provisions 
of the CEA, including but not limited to, CEA sections 2, 4b, 4c, 4o, 
4s(h)(1)(A), 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.
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    \52\ 17 CFR part 180.
    \53\ 17 CFR 23.410.
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viii. General Exemptive Authority Retained
    The trade option exemption also contains general exemptive language 
that would permit the Commission, upon written request or upon its own 
motion, to exempt any other person, either unconditionally or on a 
temporary or other conditional basis, from any provisions of part 32 
(other than the antifraud, anti-manipulation, and enforcement rules), 
or from the provisions of the Act, including any Commission rule, 
regulation, or order thereunder, otherwise applicable to any other 
swap, if the Commission finds, in its discretion, that it would not be 
contrary to the public interest to grant such exemption. This 
supplemental language tracks the general exemptive provision in the 
existing trade option exemption, and it will provide the Commission 
with the flexibility to receive and consider any concerns from market 
participants regarding the scope or implementation of the interim final 
rule trade option exemption.

D. Effective Date; Compliance Date

    The commodity options final rule and interim final rule issued 
herein shall become effective 60 days after the publication of this 
document in the Federal Register.
    The compliance date for the final rule and the interim final rule 
shall be 60 days after the term ``swap'' is further defined pursuant to 
section 721 of the Dodd-Frank Act (i.e., 60 days after the further 
definition of ``swap'' is adopted by the Commission and the SEC and 
published in the Federal Register). However, for the purpose of 
complying with (1) final rule Sec.  32.2(a), which permits entering 
into commodity options transactions in compliance with

[[Page 25329]]

and subject to the provisions of the Act, including any Commission 
rule, regulation, or order thereunder, otherwise applicable to any 
other swap, and (2) the conditions and provisions of the interim final 
rule trade option exemption under Sec.  32.3, the compliance date for 
this final rule and interim final rule shall be the compliance date 
associated with any such swaps rules. That is, notwithstanding the 
effective or compliance dates identified herein, commodity options 
market participants need not comply with any applicable condition 
referencing a swap rule, regulation, or order, until such time as the 
rule, regulation, or order is applicable to any other swap. In 
addition, the first relevant compliance date for the Form TO notice 
filing requirement will be for the calendar year beginning January 1, 
2013. That is, counterparties to unreported trade options are required 
to submit a Form TO in connection with their unreported trade options 
entered into between January 1 and December 31, 2013 on or before March 
1, 2014. There is no Form TO filing requirement for unreported trade 
options entered into between the effective date of this rule and 
December 31, 2012.

V. Interim Final Rule Matters

    This document implements regulations addressing the inclusion of 
commodity options in the Dodd-Frank Act definition of ``swap.'' Section 
721 of the Dodd-Frank Act defines the term ``swap'' to include an 
option of any kind that is for the purchase or sale, or based on the 
value, of one or more commodities. The existing trade option exemption 
exempts certain trade options from the CEA almost entirely and was 
enacted pursuant to section 4c(b) of the CEA, which provides the CFTC 
with plenary authority to issue regulations related to commodity 
options. Such authority was not amended by the Dodd-Frank Act, and 
therefore, Congress continues to vest the Commission with plenary 
authority over commodity options. Prior to the Dodd-Frank Act, CFTC 
regulations provided for a trade option exemption, permitting the 
trading of qualifying transactions subject only to antifraud, anti-
manipulation, and enforcement rules.\54\ As discussed above, the Dodd-
Frank Act defined commodity options as swaps. Accordingly, the CFTC 
proposed to amend the commodity options rules generally, and to 
specifically withdraw the trade option exemption, thereby providing 
that commodity options could transact subject to the same laws, rules, 
regulations, and orders otherwise applicable to all other swaps, 
consistent with the Dodd-Frank Act. As explained in the comment summary 
above, the proposal requested comment regarding trade options and 
multiple commenters requested that the CFTC retain some form of a trade 
option exemption, particularly for physically delivered options. 
Therefore, in response to comments, and pursuant to its plenary 
authority over commodity options, the CFTC is implementing a revised 
trade option exemption, with certain conditions described above, 
through this interim final rule.
---------------------------------------------------------------------------

    \54\ See prior 17 CFR 32.4.
---------------------------------------------------------------------------

    The CFTC nevertheless invites comments on this interim final rule 
and, when assessing whether to amend the interim final trade option 
exemption, will consider all timely comments submitted during the 
public comment period as described in the following section.

VI. Request for Comment on Interim Final Rule

    In connection with the interim final rule's trade option exemption 
in Sec.  32.3 adopted herein, the Commission requests comment on the 
following questions:
    1. Generally, does the interim final rule issued herein provide an 
appropriate regulatory framework for trade options?
    2. Regarding the trade option exemption, will such provision 
preserve appropriate hedging opportunities for current users of the 
trade options market? Is there any reason not to retain the trade 
option exemption as issued herein?
    a. What types of entities offer trade options pursuant to the 
existing trade option exemption? Is the scope of the trade option 
exemption offeror requirement in the interim final rule (i.e., offerors 
must be ECPs or commercials) appropriate? Alternatively, is this 
offeror requirement either too broad or too narrow?
    b. Is the scope of the trade option exemption offeree requirement 
in the interim final rule (i.e., offerees must be commercials) 
appropriate? Alternatively, is this offeree requirement either too 
broad or too narrow? Should ECPs that are not commercials be permitted 
as offerees? Why or why not?
    c. Is the list of commercials described in the interim final rule 
(i.e., a producer, processor, or commercial user of, or a merchant 
handling the commodity that is the subject of the commodity option 
transaction, or the products or by-products thereof) appropriate? 
Alternatively, is this description of commercials either too broad or 
too narrow?
    d. Is the range of commodity option transactions that would qualify 
for the trade option exemption appropriate?
    i. By requiring that a trade option, when exercised, must result in 
the immediate (spot) or deferred (forward) shipment or delivery of an 
exempt or agricultural commodity, would the interim final rule 
improperly exclude other commodity option transactions, including other 
transactions with optionality, that should be eligible for a trade 
option exemption?
    ii. In the alternative, is this physical delivery requirement of 
the trade option exemption too broad?
    e. Should the interim final rule retain the general exemptive 
authority at Sec.  32.3(e)?
    f. In connection with Sec.  32.3:
    i. Is the requirement to comply with the part 45 recordkeeping 
rules for all trade option participants appropriate?
    ii. Is the requirement that certain trade options be reported 
pursuant to the reporting provisions of part 45 appropriate?
    1. Alternatively, should there be a de minimis threshold below 
which part 45 reporting would not apply to a trade option transaction 
and its participants (unless they are SDs/MSPs)?
    2. If the response to the foregoing question is yes, should the de 
minimis threshold be based on the underlying transactions (volume, 
value, or some other measure), the participant characteristics, both, 
or some other measure? Where practicable, please identify a specific 
level at which a de minimis threshold may be set.
    iii. In Sec.  32.3(b)(1)(i), the Commission provides that trade 
options reporting for commodity options is required for counterparties 
that have become obligated to comply with the reporting requirements of 
part 45. The Commission understands that in some circumstances a 
counterparty that transacts trade options may not, itself, be obligated 
to report under part 45, but may be affiliated, at the enterprise or 
group level, with another entity that complies with part 45. There may 
be circumstances, therefore, where the obligation to report trade 
options would be more appropriately based on trade options activity and 
part 45 reporting at the enterprise or group level.
    1. How often do cases occur in which a person that is subject to 
part 45 receives, in the ordinary course of business, transaction-level 
trade options information from a trade option counterparty affiliate 
that is not subject to part 45?

[[Page 25330]]

    2. Should Sec.  32.3(b)(1) be revised to account for such 
situations and, if so, how? \55\
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    \55\ For example, should the requirement in Sec.  32.3(b)(1)(i) 
to report trade options extend to trade options counterparties that 
have become obligated to comply with the reporting requirements of 
part 45, or are affiliated with a person that is required to comply 
with the reporting requirements of part 45, provided that such an 
affiliate obtains through the ordinary course of business 
transaction-level information on the trade options entered into by 
the counterparty? An ``affiliate'' is a person that is either 
commonly owned or commonly controlled, consistent with existing CFTC 
affiliate rules. Two persons would be commonly owned affiliates if 
one party directly or indirectly holds a majority ownership interest 
in the other, or if a third party directly or indirectly holds a 
majority interest in both, based on holding a majority of the equity 
securities of an entity, or the right to receive upon dissolution 
the contribution of a majority of the capital of a partnership. Two 
persons are commonly controlled affiliates if either (1) one person 
possesses the power, directly or indirectly, to direct or cause the 
direction of the management and policies of the other person whether 
through the ownership of voting securities, by contract or otherwise 
or (2) a third person possesses the power, directly or indirectly, 
to direct or cause the direction of the management and policies of 
both persons whether through the ownership of voting securities, by 
contract or otherwise.
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    iv. Is the requirement that counterparties to unreported trade 
options submit an annual notice filing, via Form TO, for the purpose of 
notifying the Commission that such counterparty entered into one or 
more unreported trade in the prior calendar year appropriate?
    1. Alternatively, should these trade options be reported pursuant 
to part 45, notwithstanding that these counterparties do not otherwise 
comply with those requirements in connection with their swap trading 
activities? What would be the costs and benefits of this alternative 
condition? Please provide data and estimates to support your comments.
    2. Should Form TO be required to be submitted more often (e.g., 
quarterly or monthly) and/or to require additional data fields (e.g., 
expired and/or open trade options and transaction specific data for 
each unreported trade option)? What would be the costs associated with 
requiring more frequent and/or more detailed filings? Please provide 
data and estimates to support your comments.
    v. Is the swaps large trader reporting condition (part 20) 
appropriate for the trade option exemption?
    vi. Is the position limit condition (part 151) appropriate for the 
trade option exemption?
    vii. Are the SD and MSP recordkeeping, reporting, and risk 
management conditions, as applied via part 23, appropriate for SDs and 
MSPs transacting under the trade option exemption?
    viii. Is the condition retaining the applicability of CEA section 
4s(e) (Capital and Margin Requirements for SDs and MSPs) appropriate?
    ix. Are the antifraud, anti-manipulation, and enforcement related 
conditions appropriate for the trade option exemption?
    x. Since trade options have to be physically delivered and may only 
be offered to commercials for use in their business as such, does it 
makes sense to exclude trade options from the calculation of whether or 
not a market participant is required to register as an SD or MSP? 
Alternatively, is there any reason to include trade options in the 
calculation of whether or not a market participant is required to 
register as an SD or MSP?
    3. Does the interim final rule issued herein omit or fail to 
appropriately consider any other areas of concern regarding commodity 
options?
    4. The Commission also invites comments on the costs and benefits 
considerations of the interim final rule under CEA section 15a, below. 
The Commission specifically requests that commenters quantify the costs 
and benefits, where practical.
    Comments on these questions and the interim final rule must be 
submitted to the Commission, pursuant to the instructions provided 
above, on or before June 26, 2012.

VII. Related Matters

A. Cost Benefit Considerations

1. Background
    Prior to the passage of the Dodd-Frank Act, the Commission's 
regulations permitted certain commodity option transactions, including 
``trade options.'' As described above and in the NPRM, trade options 
are used by commercial entities entering into the commodity option 
transactions solely for purposes related to their business involving 
the commodity.\56\ Buyers and sellers of trade options transact 
bilaterally off-exchange.\57\
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    \56\ 76 FR 6095, 6102, Feb. 3, 2011 (citing 17 CFR 32.4(a), 
which exempts a commodity option when it is offered to ``a producer, 
processor, or commercial user of, or a merchant handling, the 
commodity which is the subject of the commodity option transaction, 
or the products or by-products thereof, and that such producer, 
processor, commercial user or merchant is offered or enters into the 
commodity option transaction solely for purposes related to its 
business as such'').
    \57\ See 17 CFR 32.4. See also 17 CFR part 35 as in effect prior 
to December 31, 2011. In addition, there was a stand-alone 
regulatory regime for agricultural trade options set forth in pre 
Dodd-Frank 17 CFR 32.13.
---------------------------------------------------------------------------

    Under the pre-Dodd-Frank regulatory construct, neither the buyer 
nor the seller of a commodity trade option were required to register 
with the Commission, maintain books and records, or report their 
transactions to the Commission in connection with their trade options 
activity. As a result, the current trade option market is opaque, 
affording virtually no regulatory visibility into its composition and 
scope.\58\
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    \58\ As discussed further below, as a consequence, the 
Commission is without reliable data from which to assess the size of 
the commodity options market or the number or types of market 
participants in it, which in turn makes quantification of the costs 
and benefits of this rulemaking largely impracticable.
---------------------------------------------------------------------------

    Congress altered the foundation for this regulatory construct in 
passing the Dodd-Frank Act, by, among other things, determining that 
the definition of ``swap'' would include, among other products, 
commodity options. Section 721 of the Dodd-Frank Act added section 
1a(47) to the CEA, defining ``swap'' to include not only ``any 
agreement, contract, or transaction commonly known as,'' among other 
things, ``a commodity swap,'' but also ``[an] option of any kind that 
is for the purchase or sale, or based on the value, of 1 or more * * * 
commodities * * *.'' \59\ In addition, the Dodd-Frank Act mandated 
substantial changes in the swaps regulatory regime to reduce risk, 
increase transparency, and promote market integrity within the 
financial system.
---------------------------------------------------------------------------

    \59\ Section 1(a)(47) specifically excludes from the definition 
of ``swap'' any option on a contract of sale of a commodity for 
future delivery (i.e., options on futures traded on designated 
contract markets). See CEA section 1(a)(47)(B)(i).
---------------------------------------------------------------------------

    This legislative act implicitly required the Commission to revisit 
its historical treatment of commodity options, including trade options. 
In so doing, the Commission is mindful that one of the purposes of the 
Dodd-Frank Act is to increase transparency of the financial markets, 
including the commodity options markets.
    In response to the Dodd-Frank Act's definition of ``swap'' to 
include options, on February 3, 2011, the Commission published in the 
Federal Register a Notice of Proposed Rulemaking (``NPRM'') that 
proposed to treat all commodity options (other than options on futures) 
as swaps. In the NPRM, the Commission proposed to require that all such 
commodity option transactions, including trade options, comply with the 
requirements that apply to swaps generally. While the NPRM received 
significant public comment, no commenter provided any quantitative data 
on costs or benefits.
    Comments to the NPRM from the Energy Working Group typified 
commenters' concern that treating options on physical commodities like

[[Page 25331]]

any other swaps would impose significant costs:

    Treating Physical Options transacted in such markets as 
``swaps'' would create uncertainty and impose costly and duplicative 
regulatory requirements.\60\
---------------------------------------------------------------------------

    \60\ Energy Working Group at 2.
---------------------------------------------------------------------------

    [T]he Working Group sees no reason the Commission should not 
continue to treat Physical Options entered into by a commercial 
entity as commercial transactions exempt from the majority of the 
provisions of the CEA.\61\
---------------------------------------------------------------------------

    \61\ Energy Working group at 11.

    And in specific response to the NPRM's removal of the trade option 
exemption provided for in pre-Dodd-Frank Sec.  32.4 of the Commission's 
regulations, commenters urged the Commission to reconsider, as 
exemplified by the following comments from APGA and EEI-EPSA, 
---------------------------------------------------------------------------
respectively:

    Although the Commission concludes that removal of the trade 
option exemption will have limited impact on market participants 
because of the swap end-user exemption, the regulatory requirements 
which would apply if these cash contracts are treated as though they 
are options would be enormous. First, characterizing these contracts 
as options would require compliance with all of the swap rules, 
including possibly requiring a natural gas producer whose only 
business is selling the physical product to register as a swap 
dealer.\62\
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    \62\ APGA at 4.
---------------------------------------------------------------------------

    Regulations that make effective risk management tools and 
physical supply more costly for end-users of swaps and commodity 
options will result in higher and more volatile energy prices for 
retail, commercial, and industrial customers.\63\
---------------------------------------------------------------------------

    \63\ EEI-EPSA at 3.

    The Commission also received specific comments requesting a trade 
option exemption for options that, if exercised, result in physical 
delivery.\64\ Commenters also explained the need to retain a trade 
option exemption in the context of agricultural trade options.\65\
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    \64\ EEI-EPSA at 7-8.
    \65\ Commodity Options and Agricultural Swaps Working Group at 
3-4.
---------------------------------------------------------------------------

    In this final rulemaking, the Commission is repealing and replacing 
the Commission's regulations concerning commodity options. Upon 
consideration of the comments to the NPRM, the Commission also is 
adopting an interim final rule that incorporates an exemption for 
``trade options.''
    In the discussion that follows, the Commission considers the costs 
and benefits of, and alternatives to, amending the regulations 
applicable to commodity options, including the trade option exemption 
that makes up the interim final rule, Sec.  32.3; this interim final 
rule, the Sec.  32.3 trade option exemption, will operate as an 
alternative to the general commodity options authorization in Sec.  
32.2. The Commission considers these costs and benefits of its actions 
in the discussion that follows.
2. Statutory Mandate To Consider the Costs and Benefits of the 
Commission's Action: CEA Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. Section 15(a) further 
specifies that the costs and benefits shall be evaluated in light of 
the following five broad areas of market and public concern: (1) 
Protection of market participants and the public; (2) efficiency, 
competitiveness and financial integrity of futures markets; (3) price 
discovery; (4) sound risk management practices; and (5) other public 
interest considerations. The Commission considers the costs and 
benefits resulting from its own discretionary determinations with 
respect to the section 15(a) factors.
    The costs and benefits associated with the inclusion of commodity 
options in the definition of swap in the Dodd-Frank Act are 
attributable to Congress, and therefore beyond the scope of the 
consideration of costs and benefits required by CEA section 15(a). The 
Commission considers the costs and benefits attributable to its actions 
in this rulemaking against the basic framework provided by the 
statute--in which options are swaps subject to all of the requirements 
attendant to that definition under the Dodd-Frank Act and the CEA (as 
amended by Dodd-Frank Act).
    In proposing the rules, the Commission requested comment on all 
aspects of its cost benefit analysis, including the identification and 
assessment of any costs and benefits not discussed in our analysis, and 
data relevant to these costs and benefits. Several commenters provided 
comments on the costs and benefits of the proposal in qualitative 
terms, but none provided data from which to quantify costs and 
benefits.
    The opacity with which trade options historically have been 
transacted affords the Commission no meaningful visibility with respect 
to the composition and scope of trade option activities necessary to 
quantify costs and benefits of this rulemaking. The lack of 
quantification in comments reinforces this conclusion and further 
demonstrates that there is no reasoned basis for determining how many 
commercials engage in commodity options or, more specifically, trade 
options. In other words, there is no reliable information from which to 
assess the number of commercials that transact in commodity options 
today, or will do so in the future. There is also no way determine the 
number or type of entities that would choose to avail themselves of the 
trade option exemption that is the subject of this interim final rule. 
Notwithstanding these limitations, based on the comments received, it 
is apparent that commercials place great importance on the continued 
availability of a trade option exemption.
3. Benefits and Costs of the Final Rule
a. Benefits
    The purpose and primary benefit of the final rule is to align the 
Commission's general commodity options provisions in part 32 with the 
Dodd-Frank swaps regime by providing, in general, that commodity 
options that are swaps (i.e., commodity options other than options on 
futures) will be treated the same as all other swaps, with one 
exception: commodity options satisfying the terms of a revised trade 
option exemption. The final rule is permissive and administrative in 
nature, necessitated by the Commission's plenary rulemaking authority 
over commodity options, which provides that: ``No person shall offer to 
enter into, enter into or confirm the execution of, any transaction 
involving any commodity regulated under this chapter which is [a 
commodity option transaction], contrary to any rule, regulation, or 
order of the Commission prohibiting any such transaction or allowing 
any such transaction under such terms and conditions as the Commission 
shall prescribe.'' \66\ As discussed above, the final rule also permits 
DCM-traded options on underlying commodities, albeit under the 
provisions of new part 32 rather than existing part 33. New part 32 
permits commodity options to trade subject to the same rules applicable 
to any other swap, and the Dodd-Frank Act permits swaps to be 
transacted on a DCM. These changes will further the public benefits 
Congress intended by applying the swaps statutory and regulatory 
regimes to commodity options generally.
---------------------------------------------------------------------------

    \66\ See CEA section 4c(b).
---------------------------------------------------------------------------

b. Costs
    The Commission does not believe there are significant, if any, 
costs associated with the final rule relative to the requirements 
imposed by statute.

[[Page 25332]]

This is so because the final rule does not, by itself, impose any 
substantive or administrative requirements on commodity option market 
participants. Rather, by adopting this final rule, the Commission 
provides the required general authorization for commodity options that 
are subject to the swap definition, and removes any uncertainty as to 
whether CEA section 4c(b) would otherwise prohibit such commodity 
options. This is not to say that there are no significant costs 
associated with transacting commodity options. Although not specific to 
this final rule, there are costs attendant to the various regulations 
applicable to transacting in commodity options, including the costs of 
recordkeeping and reporting requirements. Those costs, however, are 
discussed in the various swaps rules that impose the substantive 
requirements.\67\
---------------------------------------------------------------------------

    \67\ E.g., Large Trader Reporting for Physical Commodity Swaps, 
76 FR 43851, Sept. 20, 2011; Position Limits for Futures and Swaps, 
76 FR 71626, Nov. 18, 2011; and Swap Dealer and Major Swap 
Participant Recordkeeping, Reporting, and Duties Rules; Futures 
Commission Merchant and Introducing Broker Conflicts of Interest 
Rules; and Chief Compliance Officer Rules for Swap Dealers, Major 
Swap Participants, and Futures Commission Merchants, 77 FR 20128, 
Apr. 3, 2012.
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4. Interim Final Rule Benefits and Costs
a. Benefits
    Under the CEA, as amended by the Dodd-Frank Act, the Commission is 
under no statutory obligation to issue an exemption for trade options. 
In fact, a plain reading of section 721 of the Dodd-Frank Act makes 
clear that all commodity options are swaps, without any special 
treatment of trade options. However, in light of the comments received, 
the Commission believes that retaining a trade option exemption is in 
the public interest.
    The purpose and primary benefit of the interim final rule is that 
it preserves a means for hedging by commercial market participants 
through physically delivered options, albeit with important conditions 
and modifications from the existing trade option exemption. More 
specifically, the interim final rule provides a benefit (relative to 
the statutory requirements) in the form of a cost-saving exemption from 
certain swaps regulations for trade options on exempt and agricultural 
commodities as between certain commercial and financially-sophisticated 
counterparties. Additionally, the interim final rule benefits market 
participants that meet the conditions of the trade option exemption by 
eliminating the costs and inefficiencies that could result if the 
Commission were to pursue the alternative of requiring entity- or 
product-specific requests for exemptive orders.\68\
---------------------------------------------------------------------------

    \68\ Nevertheless, the Interim Final Rule does permit 
individuals to request exemptive orders on a case-by-case basis.
---------------------------------------------------------------------------

b. Costs
    Although we consider certain costs that may result from the interim 
final rule, and make comparisons to various alternatives, the 
Commission does not believe that the interim final rule will impose 
mandatory costs on any entity because the rule is exemptive, rather 
than prescriptive, and entities are not required to rely on it. 
Therefore, the Commission assumes that an entity will rely on the 
exemption only if the anticipated benefits warrant the costs attendant 
to the conditions the Commission is attaching to the exemption. 
Notwithstanding this assumption, the conditions on the trade option 
exemption may impose some costs on entities that choose to rely on it.
    The interim final rule conditions the ability to transact trade 
options under the exemption on the following: offerors must be ECPs or 
commercials; offerees must be commercials; and the trade option, if 
exercised, must result in physical delivery.
    Under the interim final rule, those relying on the trade option 
exemption must comply with certain regulatory requirements, including: 
Recordkeeping and reporting; position limits; and large trader 
reporting. While the conditions applicable to entities availing 
themselves of the trade option exemption--for example, compliance with 
position limits and large trader reporting, and subjection to the 
various enforcement provisions \69\--are part of this Commission 
action, most of the costs and benefits of those requirements are 
discussed in other rulemakings, or are otherwise not expected to be 
significant. The costs and benefits of the recordkeeping and reporting 
obligations are discussed elsewhere.\70\ Moreover, reporting pursuant 
to the swaps large trader rules in part 20 will only be required for 
SDs and clearing members, and, based on the comments received on the 
NPRM, few trade option buyers are likely to fall within either of these 
categories. The speculative position limit rules of part 151 will only 
apply to trade options that involve ``referenced contracts'' pursuant 
to the terms of part 151, and the Commission expects that most trade 
options entered into by commercial parties would be exempt from 
position limits in any event based on a position limit exemption for 
bona fide hedging transactions. The SD and MSP-specific conditions in 
the trade option exemption, which incorporate certain provisions from 
part 23, similarly do not impose any additional cost burden on SDs/MSPs 
beyond the retention of existing rules applicable to SDs/MSPs.
---------------------------------------------------------------------------

    \69\ See, e.g., Prohibition on the Employment, or Attempted 
Employment, of Manipulative and Deceptive Devices and Prohibition on 
Price Manipulation, 76 FR 41398, July 14, 2011.
    \70\ See Swap Data Recordkeeping and Reporting Requirements, 77 
FR 2136, Jan. 13, 2012 (``Recordkeeping and Reporting Rules'').
---------------------------------------------------------------------------

    The costs attributable to the Commission's exercise of discretion 
in this rulemaking--and that have not been considered in other 
rulemakings--are those generated by the reporting and recordkeeping 
requirements imposed upon commercials transacting in trade options but 
not otherwise reporting their transactions. This action should reduce 
costs relative to the basic statutory requirements (with no further 
action by the Commission) which would have subjected all trade options 
to the full array of regulatory requirements for swaps, including but 
not limited to part 45. However, the Commission requests information 
and estimates about the costs and benefits to market participants and 
the public that would result from requiring market participants to 
report on their trade options at two levels: (1) the enterprise or 
group level (as described in section VI, question 2(f)(iii), above), 
and (2) the person level as is provided for in the interim final rule 
at Sec.  32.3(b)(1)(i).
c. Costs and Benefits as Compared to Alternatives
    The range of alternative conditions available to the Commission 
with respect to who may transact trade options is wide--that is, the 
Commission could have decided that anyone or no one could be an offeror 
or offeree. Either of these extremes, however, would render almost 
meaningless either the exemption (if no one could be an offeror or an 
offeree) or the option element of the swap definition (if anyone could 
be an offeror or an offeree). Therefore, in striving to achieve the 
optimal balance of allowing those with a commercial need to hedge the 
price risk of a physical commodity while ensuring that there are enough 
market participants to provide the necessary liquidity to hedge that 
risk, the Commission determined to allow ECPs and non-ECP commercials 
to be offerors. On the offeror side, excluding commercial non-ECPs 
would have limited hedging opportunities available to non-ECPs who are 
active users of trade options as both buyers and sellers,

[[Page 25333]]

depending on their commercial need. On the offeree side, the Commission 
considered it important to preserve the integrity of the trade options 
market for use by commercial users. If the rule had allowed entities 
other than commercial users to be buyers, the trade option market would 
be indistinguishable, arguably, from the general swaps market; there 
would be no connection between a buyer's purchase of a trade option, 
the trade option buyer's underlying commercial functions, and the 
buyer's commercial need to make and take delivery.
    Similarly, the Commission could have elected to make the exemption 
available for trade options that, if exercised, result in either 
physical or financial settlement of the option. The Commission limited 
the condition to physical settlement out of a concern that if it 
allowed financial settlement, parties could evade the requirements 
otherwise applicable to swaps by merely labeling their transaction a 
trade option even though it was unrelated to their business as a 
commercial. The Commission notes, as did commenters, that the trade 
option exemption is rooted in a need by commercials to hedge the price 
risk of physical commodities, including but not limited to agricultural 
and energy commodities. Permitting financially-settled trade options 
would make this market, which is used for making or taking delivery of 
physical commodities needed for a commercial function, 
indistinguishable from the financial world of swaps and futures. In 
addition, and as noted above, commenters focused on the need for a 
trade option exemption specifically for physically delivered options. 
The Commission did not receive similar comments regarding financially 
settled transactions.
    The Commission also had a range of alternatives with respect to 
regulatory requirements applicable to trade option transactions. For 
commercials, the Commission considered alternatives, ranging from 
requiring full compliance with part 45 to no requirements in light of 
its special call authority to request and obtain information. Given 
that one of the purposes of the Dodd-Frank Act is to increase market 
transparency and regulatory visibility into OTC markets, however, the 
Commission does not believe an exemption with no attendant 
recordkeeping or reporting requirements for commercials is a reasonable 
alternative.\71\ At the same time, the Commission believes that 
requiring full compliance with part 45's recordkeeping and reporting 
requirements by commercials would be unnecessary to achieve the desired 
and expected benefits of the interim final rule. Therefore, to mitigate 
the costs of compliance for otherwise non-reporting counterparties, the 
Commission is only requiring such counterparties to keep basic business 
records regarding their trade options transactions and to file an 
annual report with the Commission.\72\
---------------------------------------------------------------------------

    \71\ See Recordkeeping an Reporting Rules, 77 FR at 2141, Jan. 
13, 2012 (explaining that ``[c]omplete records regarding each swap 
should be required from all counterparties, including non-SD/MSP 
counterparties to physical commodity swaps and other swaps, because 
such records are essential for effective market oversight and 
prosecution of violations by the Commission and other regulators'' 
and that ``[e]xperience with recordkeeping requirements in the 
context of futures suggests that all market participants are able to 
retain such records'').
    \72\ The annual report would require counterparties to 
unreported trade options to provide: name and contact information; 
commodity categories (agricultural, metals, energy, or other); and 
approximate value (under $10 million, $10-100 million, over $100 
million) of commodities purchased or delivered in connection with 
options exercised during the prior calendar year.
---------------------------------------------------------------------------

    The Commission believes that the recordkeeping requirement in the 
interim final rule may result in additional costs for commercials that 
currently do not maintain the now-required records. However, the 
Commission believes that most, if not all, commercials already retain 
the basic business records required by the new rule as a matter of good 
business practice. With respect to reporting, the Commission believes 
the form prescribed by the Commission for annual reports will entail 
some administrative and legal costs for such commercials.
    Additionally, because the Commission believes that a distinction 
between agricultural commodities and other physical commodities is 
unwarranted, it is permitting agricultural trade options to rely on the 
revised general trade option exemption. The Commission declined to 
adopt the alternative that would have maintained this historically 
distinct treatment of trade options on agricultural commodities 
because, as commenter NGFA stated, the distinction was unwieldy and, 
consequently, the agricultural trade option (ATO) regime was largely 
unused.\73\ The Commission also did not elect to carry over the $10 
million net worth restriction under the existing ATO exemption in Sec.  
32.13(g). The Commission anticipates that the new trade option 
exemption will create new hedging opportunities for a wide range of 
agricultural commercial market participants that have heretofore been 
precluded from entering into trade options for agricultural commodities 
by that net worth restriction.
---------------------------------------------------------------------------

    \73\ NGFA at 2.
---------------------------------------------------------------------------

5. Section 15(a) Factors (of the Final Rule and Interim Final Rule, as 
a Whole)
    As noted above, in this final rule and interim final rule, the 
Commission considers the costs and benefits that result from the 
regulations issued herein.
a. Protection of Market Participants and the Public
    The interim final rule trade option exemption will further the 
protection of market participants and the public by ensuring that trade 
options continue to be authorized, subject to recordkeeping and 
reporting requirements, large trader reporting and position limit 
requirements, certain SD/MSP rules, and explicit antifraud, anti-
manipulation, and enforcement protections. These requirements will 
provide the Commission and the public with increased visibility into 
this marketplace and will protect market participants from fraudulent 
conduct by others. In the same way, the final rule permits commodity 
options, generally, subject to the rules and protections applicable to 
every other swap pursuant to the Dodd-Frank Act (and its related 
rulemakings).
b. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The trade option exemption provides an important hedging and risk 
management tool for commercial market participants, while also 
providing the Commission with vital visibility tools (i.e., the 
recordkeeping and reporting requirements as well as the large trader 
reporting requirement) to help ensure the integrity of these markets. 
By permitting these valuable hedging and risk management tools, the 
Commission is facilitating the ability of market participants to hedge 
their risks more efficiently, since participants will have a larger set 
of hedging mechanisms available to them. In addition, providing a 
revised trade option exemption enhances competitiveness by continuing 
to provide market participants with a range of risk management choices. 
Finally, requiring option offerors to be ECPs or commercials enhances 
financial integrity by helping to assure that option grantors will have 
some minimal level of financial resources and sophistication, or will 
be commercial in nature, in order to reduce the risk that a seller 
would not be able to perform its obligations under a commodity option.

[[Page 25334]]

c. Price Discovery
    The trade options marketplace will continue to augment the 
exchange-traded financial markets in serving their price discovery 
function for a subject commodity. The Commission notes that there will 
be less price discovery for those trade options that are not otherwise 
required to meet the part 45 reporting requirements. Nevertheless, the 
Commission believes that the conditions discussed above should allow 
the trade options market to continue functioning in a manner that 
provides enough visibility to regulators. In addition, the Commission 
would have the authority to request and obtain additional information 
from trade option counterparties under its special call authority.
d. Sound Risk Management Procedures
    The comments received on the NPRM (discussed above) highlighted 
trade options as a fundamental risk management tool for commercial 
users of many physical commodities. By issuing the interim final rule 
trade option exemption, the Commission is facilitating the use of trade 
options by these commercial market participants in conjunction with the 
general Dodd-Frank swaps regime. Specifically, when exchange-traded 
products do not provide the appropriate coverage or scope in connection 
with a hedging need for a commercial market operation, the trade option 
exemption will allow for agreements to be tailored by the parties on a 
transaction-by-transaction basis in order to meet the physical delivery 
needs of a commodity for a given commercial purpose. As noted above, 
the final rule provides an equally important component of the 
derivatives market (and a tool for risk management) by retaining a 
general authority for commodity options that are not trade options.
e. Other Public Interest Considerations
    The Commission believes that providing the revised trade option 
exemption, in conjunction with the general authorization for all 
commodity options, is consistent with the public interest (particularly 
as demonstrated by the commenters) in providing effective and efficient 
risk management tools to commercial market participants, as well as in 
providing a strong legal framework for the trade options and general 
options market. The Commission acknowledges that the revised trade 
option exemption will remove those swaps that fall within it from 
certain aspects of the Dodd-Frank regime to which they otherwise would 
be subject. Nevertheless, based on its historical experience regulating 
commodity options, and the proven past utility of a trade option 
exemption for physical delivery options used by commercial parties, the 
Commission believes that exercise of its CEA section 4c(b) plenary 
authority to exempt trade options in the interim final rule is 
appropriate and benefits the public interest. In addition, the 
recordkeeping and reporting requirements, as well as the other 
conditions discussed above, should allow the trade options market to 
continue functioning in a manner that provides sufficient visibility to 
regulators.
6. Request for Comment on CBC in Connection With Interim Final Rule
    After considering the section 15(a) factors, the Commission has 
determined to issue part 32 and the amendments to part 33 as described 
herein. The Commission invites public comment on its cost-benefit 
considerations in connection with the interim final rule trade option 
exemption. Commenters are encouraged to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the interim final rule trade option exemption with their 
comment letters. In addition, the Commission seeks comment on whether 
the offeror requirement imposes any additional costs, particularly when 
compared with the general Dodd-Frank swaps regime, which does not 
otherwise provide for the trade option classification, and whether 
limiting the trade option exemption to physically delivered contracts 
(and requiring all other commodity options to transact under the 
general swaps rules) imposes any significant or unreasonable cost on 
market participants.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (``RFA'') requires that agencies 
consider whether the rules they issue will have a significant economic 
impact on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis respecting the impact.\74\ The final 
rule, in amending part 33, would affect entities that currently engage 
in options on physical commodities on a DCM, and the final rule and 
interim final rule, in replacing part 32, would affect those entities 
that currently engage in options under Sec.  32.4 and Sec.  32.13(g). 
By generally mandating that commodity options be treated as all other 
swaps, with one exemption for trade options, the effect of the rules 
has the potential to affect designated contract markets (``DCMs''), 
derivatives clearing organizations (``DCOs''), futures commission 
merchants (``FCMs''), large traders and eligible contract participants 
(``ECPs''), as well as SDs, MSPs, commodity pool operators (``CPOs''), 
swap execution facilities (``SEFs''), swap data repositories 
(``SDRs''), and certain non-ECP commercial market participants that 
enter into trade options.
---------------------------------------------------------------------------

    \74\ See 5 U.S.C. 601 et seq.
---------------------------------------------------------------------------

1. DCMs, DCOs, FCMs, CPOs, large traders, ECPs, and ESP
    The Commission has previously determined that DCMs, DCOs, FCMs, 
CPOs, large traders, ECPs, and eligible swap participants (``ESPs'') 
are not small entities for purposes of the Regulatory Flexibility 
Act.\75\ Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the final and interim final 
rules adopted herein will not have a significant economic impact on a 
substantial number of small entities with respect to these entities.
---------------------------------------------------------------------------

    \75\ See, respectively and as indicated, 47 FR 18618, 18619, 
Apr. 30, 1982 (DCMs, CPOs, FCMs, and large traders); 66 FR 45604, 
45609, Aug. 29, 2001 (DCOs); 66 FR 20740, 20743, Apr. 25, 2001 
(ECPs); and 57 FR 53627, 53630, Nov. 12, 1992 and 58 FR 5587, 5593, 
Jan. 22, 1993 (ESPs).
---------------------------------------------------------------------------

    The Commission received one comment from the Power Coalition 
asserting that certain of its member entities may both be ECPs under 
the CEA and small businesses under the RFA. These members, as the 
Commission understands, have been determined to be small entities by 
the Small Business Administration (``SBA'') because they are 
``primarily engaged in the generation, transmission, and/or 
distribution of electric energy for sale and [their] total electric 
output for the preceding fiscal year did not exceed 4 million megawatt 
hours.'' \76\ For all entities that may both be ECPs and have been 
determined by the SBA to be small businesses under the RFA, the initial 
regulatory flexibility analysis in the proposed rulemaking and the 
final regulatory flexibility analysis, in subsection ``5'' below, 
discusses the impact of the rulemaking on small entities.
---------------------------------------------------------------------------

    \76\ Small Business Administration, Table of Small Business Size 
Standards, (Nov. 5, 2010).
---------------------------------------------------------------------------

2. SDs, MSPs, SEFs, and SDRs
    SDs, MSPs, SEFs, and SDRs are new categories of registrant under 
the Dodd-Frank Act. Pursuant to various Dodd-Frank rulemakings, the 
Commission has determined that SDs, MSPs, SEFs, and SDRs are not 
``small entities'' for purposes of the RFA.\77\ Accordingly, the

[[Page 25335]]

Chairman, on behalf of the Commission, hereby certifies pursuant to 5 
U.S.C. 605(b) that the final and interim final rules adopted herein, 
with respect to SDs, MSPs, SEFs, and SDRs, will not have a significant 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \77\ See respectively, Registration of Swap Dealers and Major 
Swap Participants, 77 FR 2613, 2620, Jan. 19, 2012 (swap dealers and 
major swap participants); Requirements for Derivatives Clearing 
Organizations, Designated Contract Markets, and Swap Execution 
Facilities Regarding the Mitigation of Conflicts of Interest, 75 FR 
63732, 63745, Oct. 18, 2010 (SEFs); and Swap Data Repositories, 75 
FR 80898, 80926, Dec. 23, 2010 (SDRs).
---------------------------------------------------------------------------

3. Entities Eligible To Engage in Options on Physical Commodities on 
DCMs Under Part 33
    Under the current part 33, there is no regulatory financial 
threshold that must be met in order to engage in options on underlying 
commodities on a DCM, so small entities would be eligible to engage in 
such transactions. In fact, there is no regulatory financial threshold 
that must be met in order to engage in any type of transaction on a 
DCM. As noted above, new CEA section 1a(47) provides that options, 
other than options on futures, are swaps. New CEA section 2(e) provides 
that non-ECPs may enter into swaps, if the swaps are entered into on a 
DCM. Therefore, even though an option on an underlying commodity is 
defined to be a swap under the Dodd-Frank Act, small entities will 
continue to be eligible to enter into such options on a DCM under the 
rules issued herein, just as they are eligible to enter into such 
options on a DCM under the current part 33. Thus, the final and interim 
final rules will have no effect on the eligibility of small entities to 
enter into an option on an underlying commodity on a DCM. Accordingly, 
the Chairman, on behalf of the Commission, hereby certifies pursuant to 
5 U.S.C. 605(b) that the final and interim final rules will not have a 
significant economic impact on a substantial number of small entities 
with respect to entities eligible to engage in options on underlying 
commodities on DCMs under part 33.
4. Entities Engaged in Options Under Sec.  32.13(g)
    The Commission addressed the question of whether entities engaged 
in agricultural trade options under Sec.  32.13(g) are, in fact, 
``small entities'' for purposes of the RFA in the NPRM. In the NPRM, 
the Commission determined that entities engaged in options under Sec.  
32.13(g) were not small entities.\78\ As noted above, the Commission 
previously has determined that ECPs are not small entities for the 
purpose of the RFA based upon, among other things, the financial and 
institutional requirements contained in the definition. Also as noted 
above, the exemption at Sec.  32.13(g) allows for options on the 
enumerated agricultural commodities to be sold when: (1) The option is 
offered to a commercial (``a producer, processor, or commercial user 
of, or a merchant handling'' the underlying commodity); (2) the 
commercial enters the transaction solely for purposes related to its 
business as such; and (3) each party to the option contract has a net 
worth of not less than $10 million. There are two analogous provisions 
in the ECP definition, new CEA sections 1a(18)(A)(v)(III) and 
1a(18)(A)(xi)(II). New CEA section 1a(18)(A)(v)(III) provides that an 
ECP includes a corporation, partnership, proprietorship, organization, 
trust, or other entity that has a net worth exceeding $1,000,000 and 
enters into a swap in connection with the entity's business or to 
manage the risk associated with an asset or liability owned or incurred 
or reasonably likely to be owned or incurred by the entity in the 
conduct of the entity's business. New CEA section 1a(18)(A)(xi)(II) 
provides that an ECP includes an individual who has assets invested on 
a discretionary basis, the aggregate of which is in excess of 
$5,000,000 and who enters the swap in order to manage the risk 
associated the an asset owned or liability incurred, or reasonably 
likely to be owned or incurred, by the individual. The participation 
requirements of Sec.  32.13(g)(1) are similar to, if not more 
restrictive than, the analogous ECP provisions.
---------------------------------------------------------------------------

    \78\ See 76 FR 6095, at 6107, Feb. 3, 2011.
---------------------------------------------------------------------------

    For purposes of the RFA in this rulemaking, the Commission is 
hereby determining that entities engaged in options under Sec.  
32.13(g) are not considered to be ``small entities'' for essentially 
the same reasons that ECPs have previously been determined not to be 
small entities. Accordingly, the Chairman, on behalf of the Commission, 
hereby certifies pursuant to 5 U.S.C. 605(b) that the final and interim 
final rules, with respect to entities engaged in options under Sec.  
32.13(g), will not have a significant impact on a substantial number of 
small entities.
5. Entities Engaged in Options Under Existing Sec.  32.4
    In the NPRM, the Commission initially addressed the question of 
whether entities engaged in trade options under the existing trade 
options rule are, in fact, ``small entities'' for purposes of the 
RFA.\79\ As noted above, under the existing trade options rule, an 
option must be offered to a producer, processor, or commercial user of, 
or a merchant handling, the commodity, who enters into the commodity 
option transaction solely for purposes related to its business as such. 
The existing trade option exemption does not include any net worth 
requirement.
---------------------------------------------------------------------------

    \79\ See 76 FR 6095, at 6017-6018, Feb. 3, 2011.
---------------------------------------------------------------------------

    Because there is no net worth requirement in the existing trade 
option rule, thus allowing commercial entities of any economic status 
to enter into trade option transactions, the Commission is not in a 
position to determine whether entities engaged in options under the 
existing trade option rule include a substantial number of small 
entities on which the rule would have a significant economic impact. 
Therefore, the Commission provided an initial regulatory flexibility 
analysis in the NPRM addressing the proposed withdrawal of the existing 
trade option exemption on small entities. In the NPRM, the Commission 
identified the small entities that would be affected by the proposed 
withdrawal as any commercial small entity that would be smaller than an 
ECP and additionally would have annual receipts of less than 
$750,000.\80\
---------------------------------------------------------------------------

    \80\ 5 U.S.C. 601(6) (threshold for certain agricultural 
entities under the RFA).
---------------------------------------------------------------------------

    As referenced above, the Commission received a comment from the 
Power Coalition that may indicate that certain of their members, in 
particular entities that are ``primarily engaged in the generation, 
transmission, and/or distribution of electric energy for sale and 
[their] total electric output for the preceding fiscal year did not 
exceed 4 million megawatt hours,'' have been determined by the SBA to 
be small entities. Such entities may enter into option transactions, 
though the Commission does not have sufficient information to determine 
that any such entities would constitute a substantial number of small 
entities for purposes of the RFA.
    Moreover, for those entities that may enter into option 
transactions that would be ECPs with annual receipts greater than 
$750,000, but that also may be small entities as determined by SBA, it 
was not indicated in comments to the initial regulatory flexibility 
analysis that the effect of the proposed rulemaking would be any 
greater for these entities than for the smaller entities the Commission 
identified in the initial analysis. Indeed, on a relative basis, the 
larger the entity, the less of an effect the rulemaking should have. 
Critically, unlike a non-ECP, which will be unable to engage in option 
transactions except

[[Page 25336]]

on a DCM, and (if a commercial) through trade options, an entity that 
is both an ECP, as that term is defined in the CEA, and a small entity, 
as determined by the SBA, will not be so restricted.
    Therefore, the Commission offers, pursuant to 5 U.S.C. 604, the 
following final regulatory flexibility analysis:
     A description of the reasons why action by the agency is 
being considered.
    The Commission is taking this regulatory action to withdraw the 
existing trade option exemption because the Dodd-Frank Act has defined 
the term ``swap'' to include options. This new definition renders the 
existing trade option exemption obsolete in its current form. 
Responding to comments received on its NPRM, a revised trade option 
exemption is being issued as interim final rule Sec.  32.3.
     A succinct statement of the objectives of, and legal basis 
for, the rule.
    The objective for issuing interim final rule Sec.  32.3, is to make 
the Commission's regulations comport with the CEA as revised by the 
Dodd-Frank Act. As stated previously, the legal basis for the rule is 
the CEA definition of swap, section 1a(47)(A)(i), and the Commission's 
plenary options authority, CEA section 4c(b).
     A description of and, where feasible, an estimate of the 
number of small entities to which the rule will apply.
    The small entities to which the withdrawal of the trade option 
exemption and issuance of the final rule may apply are those commercial 
small entities that would be smaller than an ECP and additionally would 
have annual receipts of less than $750,000, or those commercial 
entities that would be an ECP with annual receipts of greater than 
$750,000 but that have been determined by SBA to be a small entity by 
virtue of the level of total electric output for the preceding fiscal 
year or equivalent metrics that would result in the entity being a 
small entity under the RFA.\81\ Because there are no reporting or 
registration requirements in the existing trade option exemption, it is 
difficult to quantify the exact number of small entities, if any, to 
which the rule may apply, and whether such entities in the aggregate 
would constitute a substantial number of small entities compared to the 
universe of entities to which the rule could apply. However, the 
impact, if any, is largely mitigated by the inclusion of interim final 
rule Sec.  32.3, a revised trade option exemption that will continue to 
be available for small entities that are, generally speaking, 
commercial actors entering into a commodity option for commercial 
purposes--including non-ECPs.
---------------------------------------------------------------------------

    \81\ 5 U.S.C. 601(6). See also note 76, above, which relates to 
the Power Coalition's concern that certain entities that meet or 
exceed the CEA's ECP thresholds may still be small entities for 
purposes of the RFA. This initial regulatory flexibility analysis 
applies equally to such entities.
---------------------------------------------------------------------------

     A description of the projected reporting, recordkeeping, 
and other compliance requirements of the rule, including an estimate of 
the classes of small entities which will be subject to the requirement 
and the type of professional skills necessary for preparation of the 
report or record.
    The withdrawal of the existing trade option exemption does not 
impose any reporting, recordkeeping, or other compliance requirements. 
However, because the Dodd-Frank Act provides that options are swaps, 
the swaps rules being promulgated under the Dodd-Frank Act in other 
rulemakings will contain reporting, recordkeeping, and other compliance 
requirements. In addition, the interim final rule trade option 
exemption at Sec.  32.3, issued herein, includes certain compliance 
obligations. However, those conditions do not impose any significant 
burden or requirement on a small entity that has not been or will not 
be imposed through another rulemaking, for which the Commission has, in 
its discretion, addressed RFA compliance separately,\82\ or by self-
execution of the CEA as amended by the Dodd-Frank Act.
---------------------------------------------------------------------------

    \82\ See 5 U.S.C. 605(c).
---------------------------------------------------------------------------

    For example, the large trader reporting condition references part 
20, and would only fall on part 20 reporting entities, SDs and clearing 
members, and not on any small entity. The position limits condition 
would only apply part 151 position limits to the same extent they would 
apply to any other swap transaction entered into by the small entity. 
The SD/MSP rules from part 23 only apply to SDs and MSPs and not to any 
small entity. The antifraud and anti-manipulation condition has and 
will always apply to every entity transacting under the Commission's 
jurisdiction. In addition, the part 45 recordkeeping and reporting 
requirements in the trade option exemption generally only require 
recordkeeping and reporting to the same extent that such rules apply to 
any other swap, which the Commission has determined does not constitute 
a significant new burden as applied in the context of this rulemaking.
    The new Form TO annual notice filing requirement further mitigates 
the burden of the reporting requirement for counterparties who only 
engage in unreported trade options. The form is necessary to give the 
Commission at least a general overview, for market surveillance 
purposes, of the counterparties engaging in otherwise unreported trade 
options, and the types and approximate value of the commodities 
involved in such options. The form also provides contact information in 
case Commission surveillance staff needs to contact trade option 
counterparties to seek more detailed information regarding market 
events. While Form TO is a new form, and thus a new requirement for 
those required to file, it is a single annual filing, seeking very 
general and easily accessible information. The alternative to using 
form TO would be to apply the full part 45 reporting regulations.
     An identification, to the extent practicable, of all 
relevant Federal rules which may duplicate, overlap or conflict with 
the rule.
    Small entities that do not qualify as ECPs will be unable to engage 
in options transactions except on a DCM under an existing regulatory 
scheme, or if commercials, pursuant to the new trade option exemption 
in interim final rule Sec.  32.3. The trade option exemption at interim 
final rule Sec.  32.3 may be relied upon by a non-ECP that is a 
producer, processor, or commercial user of, or a merchant handling the 
commodity that is the subject of the commodity option transaction, or 
the products or by-products thereof, and that is offering or entering 
into the commodity option transaction solely for purposes related to 
its business as such. This provision will continue to permit many 
transactions that currently transact pursuant to the existing trade 
option exemption. The primary significant new requirement for trade 
options participants is the application of the recordkeeping and 
reporting requirement of part 45 (as well as the other trade option 
conditions, discussed above), and/or the Form TO notice filing 
requirement. Accordingly, there will be no rules applicable to the 
small entities, under the interim final rule trade option exemption, 
that duplicate, overlap, or conflict with any other Federal rules.
     Description of any significant alternatives to the rule 
which accomplish the stated objectives of applicable statutes and which 
minimize any significant economic impact of the rule on small entities.
    These may include, for example: (1) The establishment of differing 
compliance or reporting requirements or timetables that take into 
account the resources available to small entities; (2) the 
clarification, consolidation, or simplification of compliance and

[[Page 25337]]

reporting requirements under the rule for such small entities; (3) the 
use of performance rather than design standards; and (4) an exemption 
from coverage of the rule, or any part thereof, for such small 
entities.
    A potential alternative to limiting trade options under the 
existing trade option exemption to the requirements under interim final 
rule Sec.  32.3 (i.e., commercial participants and physically settled 
options) would be to either (1) delete the existing trade option and 
not replace it, or (2) create a special rule to allow any non-ECP to 
engage in such transactions and to allow such transactions to be either 
physically or financially settled. As explained in this document, and 
as stressed by the commenters, to adopt option (1) as a final rule 
(deleting the trade option provision altogether) would have been 
prohibitively costly and would have had a significant negative impact 
on hedging opportunities available to small entities. With regard to 
option (2), and as described above, interim final rule Sec.  32.3 
provides an exemption for certain commercial parties entering into 
physical commodity options for commercial purposes. Based on the 
comments received in response to the NPRM, discussed above, the 
Commission has determined that to treat all trade options in the same 
manner as any other swap (including permitting commodity options for 
all participants on a DCM), with the addition of the trade option 
exemption at Sec.  32.3, will provide an appropriate and flexible 
framework for the overwhelming majority of commodity options 
participants that will seek to rely on the trade option exemption. In 
addition, to retain a trade option exemption with no participant 
requirements and no physical delivery requirement would potentially 
undermine many of the market and consumer protections embodied in the 
swaps provisions of the Dodd-Frank Act.

C. Paperwork Reduction Act

    The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 
et seq. (``PRA'') are, among other things, to minimize the paperwork 
burden to the private sector, ensure that any collection of information 
by a government agency is put to the greatest possible uses, and 
minimize duplicative information collections across the government.\83\ 
The PRA applies to all information, ``regardless of form or format,'' 
whenever the government is ``obtaining, causing to be obtained [or] 
soliciting'' information, and includes required ``disclosure to third 
parties or the public, of facts or opinions,'' when the information 
collection calls for ``answers to identical questions posed to, or 
identical reporting or recordkeeping requirements imposed on, ten or 
more persons.'' \84\ The PRA requirements have been determined to 
include not only mandatory but also voluntary information collections, 
and include both written and oral communications.\85\ Under the PRA'', 
an agency may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless it displays a currently 
valid control number from the Office of Management and Budget 
(``OMB''). With the exception of the new Form TO annual notice filing 
requirement, discussed below, the Commission believes that these rules 
will not impose any new information collection requirements that 
require approval of OMB under the PRA. The Commission notes that these 
rules will involve the withdrawal of certain provisions related to 
Commission forms, and will ultimately result in the expiration, 
cancellation, or removal of such forms.\86\ Because the rules would 
ultimately result in removing or deleting form filing and/or 
recordkeeping burdens, they will not result in the creation of any new 
information collection subject to OMB review or approval under the PRA, 
except for the new Form TO annual notice filing requirement discussed 
below. As a general matter, these rules would allow commodity options 
to trade under the same terms and conditions as all other swaps and 
these rules do not, by themselves, impose any new information 
collection requirements other than those that exist or have been 
proposed in the Commission's general swap-related Dodd-Frank 
rulemakings. The same analysis applies with respect to the general 
conditions applicable under the trade option exemption in Sec.  
32.3(b)--which conditions would only apply to the same extent they 
would apply to any other swap. Similarly, the application of the part 
45 recordkeeping and reporting requirements to trade options, via 
interim final rule Sec.  32.3(b), only imposes such requirements to the 
same extent they would apply to any other swap. That is, these specific 
recordkeeping and reporting costs have been accounted for in the 
information collection prepared by the Commission with respect to its 
part 45 rules. Also, collections of information that may be associated 
with engaging in commodity options or trade options are, or will be, 
addressed within each of the general swap-related rulemakings 
implementing the Dodd-Frank Act.\87\ To avoid creating duplicative PRA 
estimates, the Commission is not accounting again for those costs with 
respect to this rulemaking. Therefore, this final rule and interim 
final rule do not constitute a new collection of information by the 
Commission, other than those that may be associated with the new Form 
TO annual notice filing requirement.
---------------------------------------------------------------------------

    \83\ See 44 U.S.C. 3501.
    \84\ See 44 U.S.C. 3502.
    \85\ See 5 CFR 1320.3(c)(1).
    \86\ This includes any forms that relate to the agricultural 
trade option rules in current 17 CFR 32.13 and the dealer option 
rules in current 17 CFR 32.12.
    \87\ See, e.g., Position Limits for Futures and Swaps, 76 FR 
71626 at 71680-71683, Nov. 18, 2011; Large Trader Reporting for 
Physical Commodity Swaps, 76 FR 43851 at 43860-43862, July 22, 2011; 
Swap Data Recordkeeping and Reporting Requirements 77 FR 2136, at 
2171-2176, Jan. 13, 2012; and Swap Dealer and Major Swap Participant 
Recordkeeping and Reporting, Duties, and Conflicts of Interest 
Policies and Procedures; Futures Commission Merchant and Introducing 
Broker Conflicts of Interest Policies and Procedures; Swap Dealer, 
Major Swap Participant, and Futures Commission Merchant Chief 
Compliance Officer, 77 FR 20128, Apr. 3, 2012.
---------------------------------------------------------------------------

    As noted above, the interim final rule imposes a new Form TO annual 
notice filing requirement on counterparties to unreported trade 
options, which requirement is considered to be a collection of 
information within the meaning of the PRA. The Commission therefore is 
required to submit to OMB an information collection request for review 
and approval in accordance with 44 U.S.C. 3506(c)(2)(A) and 5 CFR 
1320.8(d). The Commission will, by separate action, publish in the 
Federal Register a notice and request for comment on the paperwork 
burden associated with the interim final rule's Form TO annual notice 
filing requirement in accordance with 5 CFR 1320.8 and 1320.10. If 
approved, this new collection of information will be mandatory. As 
noted above, the Form TO annual notice filing would not be due to the 
Commission for the first time until March 1, 2014, for counterparties 
that enter into one or more unreported trade options during the 2013 
calendar year.
    The Commission specifically invites public comment on the accuracy 
of its estimate that no additional information collection requirements 
or changes to existing collection requirements, other than Form TO, 
would result from the interim final rule trade option exemption issued 
herein.

[[Page 25338]]

VIII. Final Rule and Interim Final Rule

List of Subjects

17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures, 
Reporting and recordkeeping requirements.

17 CFR Part 32

    Commodity futures, Consumer protection, Fraud, Reporting and 
recordkeeping requirements.

17 CFR Part 33

    Commodity futures, Consumer protection, Fraud, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing and pursuant to the authority 
contained in the Act, as indicated herein, the Commission hereby amends 
chapter I of title 17 of the Code of Federal Regulations as follows:

PART 3--REGISTRATION

0
1. The authority citation for part 3 continues to read as follows:

    Authority:  5 U.S.C. 522, 522b; 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 
13b, 13c, 16a, 18, 19, 21, and 23, as amended by Title VII of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 
111-203, 124 Stat. 1376 (July 21, 2010).


Sec.  3.13  [Removed and Reserved]

0
2. Remove and reserve Sec.  3.13.

0
3. Revise part 32 to read as follows:

PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

Sec.
32.1 Scope.
32.2 Commodity option transactions; general authorization.
32.3 Trade options.
32.4 Fraud in connection with commodity option transactions.
32.5 Option transactions entered into prior to the effective date of 
this part.
Appendix A to 17 CFR Part 32

    Authority:  7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.


Sec.  32.1  Scope.

    The provisions of this part shall apply to all commodity option 
transactions, except for commodity option transactions on a contract of 
sale of a commodity for future delivery conducted or executed on or 
subject to the rules of either a designated contract market or a 
foreign board of trade.


Sec.  32.2  Commodity option transactions; general authorization.

    Subject to Sec. Sec.  32.1, 32.4, and 32.5, which shall in any 
event apply to all commodity option transactions, it shall be unlawful 
for any person or group of persons to offer to enter into, enter into, 
confirm the execution of, maintain a position in, or otherwise conduct 
activity related to any transaction in interstate commerce that is a 
commodity option transaction, unless:
    (a) Such transaction is conducted in compliance with and subject to 
the provisions of the Act, including any Commission rule, regulation, 
or order thereunder, otherwise applicable to any other swap, or
    (b) Such transaction is conducted pursuant to Sec.  32.3.


Sec.  32.3  Trade options.

    (a) Subject to paragraphs (b), (c), and (d) of this section, the 
provisions of the Act, including any Commission rule, regulation, or 
order thereunder, otherwise applicable to any other swap shall not 
apply to, and any person or group of persons may offer to enter into, 
enter into, confirm the execution of, maintain a position in, or 
otherwise conduct activity related to, any transaction in interstate 
commerce that is a commodity option transaction, provided that:
    (1) Such commodity option transaction must be offered by a person 
that has a reasonable basis to believe that the transaction is offered 
to an offeree as described in paragraph (a)(2) of this section. In 
addition, the offeror must be either:
    (i) An eligible contract participant, as defined in section 1a(18) 
of the Act, as further jointly defined or interpreted by the Commission 
and the Securities and Exchange Commission or expanded by the 
Commission pursuant to section 1a(18)(C) of the Act; or
    (ii) A producer, processor, or commercial user of, or a merchant 
handling the commodity that is the subject of the commodity option 
transaction, or the products or by-products thereof, and such offeror 
is offering or entering into the commodity option transaction solely 
for purposes related to its business as such;
    (2) The offeree must be a producer, processor, or commercial user 
of, or a merchant handling the commodity that is the subject of the 
commodity option transaction, or the products or by-products thereof, 
and such offeree is offered or entering into the commodity option 
transaction solely for purposes related to its business as such; and
    (3) The commodity option must be intended to be physically settled, 
so that, if exercised, the option would result in the sale of an exempt 
or agricultural commodity for immediate or deferred shipment or 
delivery.
    (b) In connection with any commodity option transaction entered 
into pursuant to paragraph (a) of this section, every counterparty 
shall comply with the swap data recordkeeping requirements of part 45 
of this chapter, as otherwise applicable to any swap transaction, and 
shall:
    (1) Comply with the swap data reporting requirements of part 45 of 
this chapter to the extent that the commodity option involves at least 
one counterparty (whether as offeror or offeree) that has--
    (i) Become obligated to comply with the reporting requirements of 
part 45,
    (ii) As a reporting party,
    (iii) During the twelve month period preceding the date on which 
the trade option is entered into,
    (iv) In connection with any non-trade option swap trading activity; 
or
    (2) For any counterparty that enters into one or more commodity 
options pursuant to Sec.  32.3(a) in a calendar year that do not 
involve a counterparty described in paragraph (b)(1) of this section, 
file with the Commission by March 1 of the following year an ``Annual 
Notice Filing for Counterparties to Unreported Trade Options'' on Form 
TO, as set forth in Appendix A to this part, to be completed and 
submitted in accordance with the instructions thereto and as further 
directed by the Commission.
    (c) In connection with any commodity option transaction entered 
into pursuant to paragraph (a) of this section, the following 
provisions shall apply to every trade option counterparty to the same 
extent that such provisions would apply to such person in connection 
with any other swap:
    (1) Part 20 (Swaps Large Trader Reporting) of this chapter;
    (2) Part 151 (Position Limits) of this chapter;
    (3) Subpart J of part 23 (Duties of Swap Dealers and Major Swap 
Participants) of this chapter;
    (4) Sections 23.200, 23.201, 23.203, and 23.204 of subpart F of 
part 23 (Reporting and Recordkeeping Requirements for Swap Dealers and 
Major Swap Participants) of this chapter; and
    (5) Section 4s(e) of the Act (Capital and Margin Requirements for 
Swap Dealers and Major Swap Participants).
    (d) In addition, any person or group of persons offering to enter 
into, entering into, confirming the execution of, maintaining a 
position in, or otherwise conducting activity related to a commodity 
option transaction in interstate commerce pursuant to paragraph (a) of 
this section shall remain subject to part 180 (Prohibition

[[Page 25339]]

Against Manipulation) and Sec.  23.410 (Prohibition on Fraud, 
Manipulation, and other Abusive Practices) of this chapter and the 
antifraud, anti-manipulation, and enforcement provisions of CEA 
sections 2, 4b, 4c, 4o, 4s(h)(1)(A, 4s(h)(4)(A), 6, 6c, 6d, 9, and 13.
    (e) The Commission may, by order, upon written request or upon its 
own motion, exempt any person, either unconditionally or on a temporary 
or other conditional basis, from any provisions of this part, and the 
provisions of the Act, including any Commission rule, regulation, or 
order thereunder, otherwise applicable to any other swap, other than 
Sec.  32.4, part 180 (Prohibition Against Manipulation), and Sec.  
23.410 (Prohibition on Fraud, Manipulation, and other Abusive 
Practices) of this chapter, and the antifraud, anti-manipulation, and 
enforcement provisions of CEA sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 
4s(h)(4)(A), 6, 6c, 6d, 9, 13, if it finds, in its discretion, that it 
would not be contrary to the public interest to grant such exemption.


Sec.  32.4  Fraud in connection with commodity option transactions.

    In or in connection with an offer to enter into, the entry into, or 
the confirmation of the execution of, any commodity option transaction, 
it shall be unlawful for any person directly or indirectly:
    (a) To cheat or defraud or attempt to cheat or defraud any other 
person;
    (b) To make or cause to be made to any other person any false 
report or statement thereof or cause to be entered for any person any 
false record thereof; or
    (c) To deceive or attempt to deceive any other person by any means 
whatsoever.


Sec.  32.5  Option transactions entered into prior to the effective 
date of this part.

    Nothing contained in this part shall be construed to affect any 
lawful activities that occurred prior to the effective date of this 
part.

Appendix A to 17 CFR Part 32

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PART 33--REGULATION OF COMMODITY OPTION TRANSACTIONS THAT ARE 
OPTIONS ON CONTRACTS OF SALE OF A COMMODITY FOR FUTURE DELIVERY

0
4. The authority citation for part 33 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19, and 21, otherwise noted.


0
5. Revise the part heading to read as set forth above.

0
6. In Sec.  33.2, revise paragraph (b) to read as follows:


Sec.  33.2  Applicability of Act and rules; scope of part 33.

* * * * *
    (b) The provisions of this part apply to commodity option 
transactions that are options on contracts of sale of a commodity for 
future delivery except for commodity option transactions that are 
options on contracts of sale of a commodity for future delivery 
conducted or executed on or subject to the rules of a foreign board of 
trade.
* * * * *


Sec.  33.4  [Amended]

0
7. Amend Sec.  33.4 as follows:
0
a. Remove the words ``or for options on physicals in any commodity 
regulated under the Act,'' in the introductory text;
0
b. Remove and reserve paragraphs (a)(4) and (a)(5)(iv);
0
c. Remove the phrase ``or underlying physical'' from paragraph 
(b)(1)(iii); and
0
d. Remove the phrase ``, options on physicals,'' from paragraph (d)(3).

0
8. In Sec.  33.7:
0
a. Amend paragraph (b) introductory text by revising the second 
paragraph of the Options Disclosure Statement;
0
b. Remove the phrase ``or underlying physical commodity'' wherever it 
appears in paragraph (b)(1) including its undesignated paragraphs;
0
c. Remove the phrase ``(e.g., commitment to sell the physical)'' from 
the fourth undesignated paragraph under paragraph (b)(1);
0
d. Revise the fifth undesignated paragraph under paragraph (b)(1);
0
e. Remove the phrase ``or physical commodity'' from paragraph (b)(2) 
introductory text and paragraph (b)(2)(i);
0
f. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(5) both times it appears;
0
j. Revise the undesignated paragraph following paragraph (b)(5);
0
k. Remove the phrase ``or underlying physical commodity'' from 
paragraph (b)(6);
0
l. Remove the phrase ``or the physical commodity'' and the phrase ``or 
underlying physical commodity'' from paragraph (b)(7)(ii);

[[Page 25344]]

0
m. Remove and reserve paragraph (b)(7)(iv); and
0
o. Remove the phrase ``or underlying physical commodity'' from 
paragraphs (b)(7)(v) and (x).
    The revisions read as follows:


Sec.  33.7  Disclosure.

* * * * *
    (b) * * *
Options Disclosure Statement
* * * * *

BOTH THE PURCHASER AND THE GRANTOR SHOULD KNOW THAT THE OPTION IF 
EXERCISED, RESULTS IN THE ESTABLISHMENT OF A FUTURES CONTRACT (AN 
``OPTION ON A FUTURES CONTRACT'').
* * * * *
    (1) * * *
    The grantor of a put option on a futures contract who has a short 
position in the underlying futures contract is subject to the full risk 
of a rise in the price in the underlying position reduced by the 
premium received for granting the put. In exchange for the premium 
received for granting a put option on a futures contract, the option 
grantor gives up all of the potential gain resulting from a decrease in 
the price of the underlying futures contract below the option strike 
price upon exercise or expiration of the option.
* * * * *
    (5) * * *
    Also, an option customer should be aware of the risk that the 
futures price prevailing at the opening of the next trading day may be 
substantially different from the futures price which prevailed when the 
option was exercised.
* * * * *

    Issued in Washington, DC, on April 18, 2012, by the Commission.
David A. Stawick,
Secretary of the Commission.

Appendices to Commodity Options Final Rule and Interim Final Rule--
Commission Voting Summary and Statements of Commissioners

    Note:  The following appendices will not appear in the Code of 
Federal Regulations.

Appendix 1--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Sommers, 
Chilton, O'Malia, and Wetjen voted in the affirmative; no 
commissioner voted in the negative.

Appendix 2--Statement of Chairman Gary Gensler

    I support the final rules on Commodity Options. The Dodd-Frank 
Wall Street Reform and Consumer Protection Act includes commodity 
options within the statutory definition of ``swap.'' The final rule 
confirms that the same rules apply to commodity options as are 
applicable to other swaps, just as the law directs. In addition, the 
Commodity Futures Trading Commission will consider and seek comment 
on an interim final rule to provide a trade option exemption for 
certain commodity options that are physically delivered.
    We received a lot of feedback from commercial market 
participants that commodity options used by commercial entities to 
deliver or receive physical commodities in connection with their 
business don't need the same level of oversight as swaps. However, 
trade options will still be subject to position limits, appropriate 
reporting and recordkeeping requirements, and anti-fraud and anti-
manipulation rules. The Commission is seeking additional comments on 
the trade option exemption, but the interim final rule makes the 
relief immediate.

[FR Doc. 2012-9888 Filed 4-26-12; 8:45 am]
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