[Federal Register Volume 78, Number 164 (Friday, August 23, 2013)]
[Rules and Regulations]
[Pages 52426-52429]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20617]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AD64


Retail Commodity Transactions Under Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretation.

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SUMMARY: On December 14, 2011, the Commodity Futures Trading Commission 
(``Commission'' or ``CFTC'') issued in the Federal Register an 
interpretation (``Interpretation'') regarding the meaning of the term 
``actual delivery,'' as set forth in the Commodity Exchange Act. The 
Commission also requested public comment on whether the Interpretation 
accurately construed the statutory language. In response to the 
comments received, the Commission has determined to clarify its 
Interpretation.

DATES: Effective August 23, 2013.

FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel, 
Division of Enforcement, 312-596-0538, rhollinger@cftc.gov, or Martin 
B. White, Assistant General Counsel, Office of the General Counsel, 
202-418-5129, mwhite@cftc.gov, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\1\ Title VII 
of the Dodd-Frank Act \2\ amended the Commodity Exchange Act (``CEA'') 
\3\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major 
swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \1\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). The text of 
the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \2\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \3\ 7 U.S.C. 1 et seq.
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    In addition, section 742(a) of the Dodd-Frank Act amends section 
2(c)(2) of the CEA to add a new subparagraph, section 2(c)(2)(D) of the 
CEA,\4\ entitled ``Retail Commodity Transactions.'' New CEA section 
2(c)(2)(D) broadly applies to any agreement, contract, or transaction 
in any commodity that is entered into with, or offered to (even if not 
entered into with), a non-eligible contract participant or non-eligible 
commercial entity on a leveraged or margined basis, or financed by the 
offeror, the counterparty, or a person acting in concert with the 
offeror or counterparty on a similar basis.\5\ New CEA section 
2(c)(2)(D) further provides that such an agreement, contract, or 
transaction shall be subject to CEA sections 4(a),\6\ 4(b),\7\ and 4b 
\8\ as if the agreement, contract, or transaction was a contract of 
sale of a commodity for future delivery.\9\
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    \4\ 7 U.S.C. 2(c)(2)(D).
    \5\ 7 U.S.C. 2(c)(2)(D)(i).
    \6\ 7 U.S.C. 6(a) (prohibition against off-exchange contracts of 
sale of a commodity for future delivery).
    \7\ 7 U.S.C. 6(b) (regulation of foreign boards of trade with 
United States participants).
    \8\ 7 U.S.C. 6b (prohibition against fraud).
    \9\ 7 U.S.C. 2(c)(2)(D)(iii).
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    New CEA section 2(c)(2)(D) excepts certain transactions from its 
application. In particular, new CEA section 2(c)(2)(D)(ii)(III)(aa) 
\10\ excepts a contract of sale that results in actual delivery within 
28 days or such other longer period as the Commission may determine by 
rule or regulation based upon the typical commercial practice in cash 
or spot markets for the commodity involved.\11\
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    \10\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).
    \11\ The Commission has not adopted any regulations permitting a 
longer actual delivery period for any commodity pursuant to new CEA 
section 2(c)(2)(D)(ii)(III)(aa). Accordingly, the 28-day actual 
delivery period set forth in this provision remains applicable to 
all commodities.
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    On December 14, 2011, the Commission issued an Interpretation 
inviting public comment on whether its stated interpretation of the 
term ``actual delivery,'' as used in new CEA section 
2(c)(2)(D)(ii)(III)(aa), accurately construes the statutory 
language.\12\ The Commission received several public comments on the 
Interpretation. After thoroughly reviewing those comments, the 
Commission has determined to clarify its Interpretation in response to 
the comments received.
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    \12\ Retail Commodity Transactions Under Commodity Exchange Act, 
76 FR 77670 (Dec. 14, 2011).
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II. Summary of Comments

A. Comments Generally

    The Commission received 13 comments in response to its 
Interpretation.\13\ The comments included 11 comment letters that 
addressed the Interpretation. These 11 comment letters were submitted 
by entities representing a broad range of interests, including a self-
regulatory organization,\14\ precious metals dealers and depository 
companies,\15\ law firms,\16\ trade associations comprised of energy 
producers and suppliers,\17\ and electricity and natural gas 
suppliers.\18\
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    \13\ The comment file may be accessed at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1124.
    \14\ National Futures Association (NFA).
    \15\ Dillon Gage Group (DGG) and Monex Deposit Company and its 
affiliate (MDC).
    \16\ J.B. Grossman P.A. (JBG), Greenberg Traurig, LLP (GBT), and 
Rothgerber Johnson & Lyons LLP (RJL).
    \17\ National Energy Markets Association (NEM), Retail Energy 
Supply Association (RESA), and Commercial Energy Working Group 
(CEWG).
    \18\ Constellation NewEnergy, Inc., Green Mountain Energy 
Company, Direct Energy Services, LLC, Exelon Energy Company, Reliant 
Energy Retail Holdings, LLC, Liberty Power Corporation, and Champion 
Energy Services, LLC.
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    Of the 11 comment letters addressing the Interpretation, two voiced 
general support for the Interpretation. For example, NFA stated:

    NFA fully supports the Commission's proposed interpretation of 
the term [actual delivery] and believes that it is consistent with 
the statutory language.

    The comment letter submitted by DGG expressed its appreciation of 
the Commission's efforts to ``curtail any fraudulent retail commodity 
transactions occurring by unscrupulous actors.'' DGG further urged the 
Commission to consider delivery of precious metals to affiliates of the 
seller, but not to the seller itself, as constituting actual delivery 
under new CEA section 2(c)(2)(D)(ii)(III)(aa), stating that ``[w]hile 
we understand the CFTC's desire to ensure, among other things, that the 
seller actually has the commodity to deliver, an affiliate of one of 
the limited types of depositories described in Example 2 [of the 
Interpretation] are unlikely to be the

[[Page 52427]]

seller `fraudsters' Senator Lincoln had in mind.''
    Two of the comment letters submitted by law firms generally did not 
support the Interpretation. GBT stated that neither the Dodd-Frank Act 
nor its legislative history indicated Congress's desire to limit the 
depositories to which actual delivery could be made, and JBG voiced its 
view that delivery in the context of precious and industrial metals 
requires only transfer of title to metal, not physical delivery of 
metal.
    The third comment letter submitted by a law firm, RJL, was 
submitted on behalf of precious metals dealers. RJL requested 
clarification of when the Commission will consider the 28 days in new 
CEA section 2(c)(2)(D)(ii)(III)(aa) to begin and urged the Commission 
to allow for delivery of precious metals to additional depositories 
beyond those described in the Interpretation. RJL also requested 
clarification, as did MDC, a retail precious metals dealer, of whether 
the offset of a precious metals purchase prior to transfer of title to 
the customer and delivery of the precious metals to a depository within 
28 days would cause the original purchase to become a prohibited 
transaction under new CEA section 2(c)(2)(D).
    Finally, four of the comment letters were submitted by energy 
suppliers or trade associations comprised of energy producers and 
suppliers, and they generally requested clarification of whether new 
CEA section 2(c)(2)(D) and/or its exceptions apply to the sale and 
delivery of physical energy commodities, such as electricity and 
natural gas, to industrial, commercial, and/or retail customers on a 
recurring basis. For example, NEMA requested:

that the Commission clarify that the type of transactions which its 
retail energy marketer members typically enter into with residential 
and commercial customers, in which they contract with the customer 
to provide physical energy supply (electricity or natural gas) for 
terms that regularly in the course of business contemplate delivery 
of the physical energy commodity in excess of 28 days, were not 
intended and should not be interpreted to constitute `retail 
commodity transactions' under the Act.

B. Specific Comments

1. Functional Approach and Relevant Factors
    Significantly, no commenters criticized, expressed disagreement 
with, or questioned the underlying foundation for the Commission's 
approach in determining whether ``actual delivery'' has occurred, as 
set forth in the Interpretation: ``The determination of whether `actual 
delivery' has occurred within the meaning of new CEA section 
2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding 
delivery beyond the four corners of contract documents;'' and ``in 
determining whether actual delivery has occurred within 28 days, the 
Commission will employ a functional approach and examine how the 
agreement, contract, or transaction is marketed, managed, and 
performed, instead of relying solely on language used by the parties in 
the agreement, contract, or transaction.'' \19\ Further, no comment 
letters criticized, expressed disagreement with, or questioned the 
relevant factors the Commission enumerated in the Interpretation: 
Ownership, possession, title, and physical location of the commodity 
purchased or sold, both before and after execution of the agreement, 
contract, or transaction; the nature of the relationship between the 
buyer, seller, and possessor of the commodity purchased or sold; and 
the manner in which the purchase or sale is recorded and completed.\20\ 
Accordingly, the Commission will assess whether any given transaction 
results in actual delivery within the meaning of new CEA section 
2(c)(2)(D)(ii)(III)(aa) by employing the functional approach and 
considering the factors set forth in the Interpretation.
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    \19\ 76 FR 77670, 77672 (Dec. 14, 2011).
    \20\ Id.
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2. When the 28-Day Period Begins
    In response to the comment from RJL, the Commission is clarifying 
when it will consider the 28-day period in new CEA section 
2(c)(2)(D)(ii)(III)(aa) to begin. The Commission has determined that 
the most practical point at which to begin counting the 28 days is the 
date on which the agreement, contract, or transaction is entered into. 
This approach is consistent with the functional approach the Commission 
will take in determining whether actual delivery has occurred, and it 
should provide industry participants and the public with a readily 
ascertainable date for determining whether actual delivery has occurred 
within the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa).
3. Interpretation Examples
    The Interpretation included five examples to illustrate how the 
Commission would determine whether actual delivery has occurred within 
the meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa), and several 
comment letters urged the Commission to allow for delivery of 
commodities to depositories beyond those described in Example 2 or 
expressed disagreement with any limitation imposed on acceptable 
depositories or the precise form of delivery. The Commission has 
considered these comments and has determined to clarify the intent 
behind these examples.
    The examples are non-exclusive and are included to provide the 
public with guidance on how the Commission will apply the relevant 
factors enumerated in the Interpretation in making its determination of 
whether actual delivery has occurred within the meaning of new CEA 
section 2(c)(2)(D)(ii)(III)(aa). Examples 1 and 2 do not encompass all 
scenarios in which the Commission may determine that actual delivery 
has occurred, nor do Examples 3, 4, and 5 encompass all scenarios in 
which the Commission may determine that actual delivery has not 
occurred. Specifically, with regard to Example 2, the Commission may 
determine that actual delivery has occurred if a commodity is delivered 
to an affiliate of the seller or is already physically located at a 
depository, so long as the commodity is otherwise delivered in 
accordance with the methods described in Example 2, if a careful 
consideration of the other relevant factors enumerated in the 
Interpretation demonstrates that the purported delivery is not simply a 
sham and that actual delivery has occurred within the meaning of new 
CEA section 2(c)(2)(D)(ii)(III)(aa). Conversely, the Commission may 
determine that actual delivery has not occurred if a commodity is 
purportedly delivered to an affiliate of the seller, but the Commission 
is unable to obtain sufficient assurances within a reasonable period of 
time that the purported delivery is not simply a sham.
4. Offsetting of Transactions
    Two commenters, in response to Example 5 of the Interpretation, 
requested clarification of whether the offset of a precious metals 
purchase prior to transfer of title to the customer and delivery of the 
precious metals to a depository within 28 days would cause the original 
purchase to become a prohibited transaction under new CEA section 
2(c)(2)(D). After careful consideration of this comment, the Commission 
has determined that Example 5 accurately illustrates the Commission's 
views of whether actual delivery will have occurred under the 
circumstances described in Example 5. However, the Commission 
recognizes that a customer may request to cancel a purchase of a 
commodity prior to actual delivery of the commodity within 28 days due 
to extraordinary market

[[Page 52428]]

circumstances. Accordingly, the Commission will not prosecute a seller 
for permitting such a cancellation, provided that the seller does so 
only on limited occasions and at the customer's request, and further 
provided that the customer does not enter into a subsequent transaction 
within three business days of such cancellation.
5. Energy Producers and Suppliers
    Four comment letters requested clarification of whether new CEA 
section 2(c)(2)(D) and/or any of its exceptions apply to the sale and 
delivery of physical energy commodities to industrial, commercial, and/
or retail customers on a recurring basis. Specifically, under the 
scenario described in these comment letters, energy firms enter into 
fixed price contracts with customers to supply electricity or natural 
gas to the customer's residence or business for a period of one or more 
years. The customer consumes the electricity or natural gas and 
subsequently pays for that usage, along with all applicable taxes, on a 
periodic basis. The Commission is not of the view that new CEA section 
2(c)(2)(D) applies to this scenario, particularly in light of the fact 
that the customer regularly receives delivery of and consumes the 
physical energy commodity over the term of the contract and 
periodically pays for that usage.

III. Commission Interpretation of ``Actual Delivery''

    In consideration of the foregoing, the Commission issues the 
following interpretation to inform the public of the Commission's views 
as to the meaning of the term ``actual delivery'' as used in new CEA 
section 2(c)(2)(D)(ii)(III)(aa) and to provide the public with guidance 
on how the Commission intends to assess whether any given transaction 
results in actual delivery within the meaning of the statute. This 
interpretation does not address the meaning or scope of new CEA section 
2(c)(2)(D)(ii)(III)(bb) \21\ or any exception to new CEA section 
2(c)(2)(D) other than new CEA section 2(c)(2)(D)(ii)(III)(aa). 
Similarly, this interpretation does not address the meaning or scope of 
contracts of sale of a commodity for future delivery, the forward 
contract exclusion from the term ``future delivery'' set forth in CEA 
section 1a(27),\22\ or the forward contract exclusion from the term 
``swap'' set forth in CEA section 1a(47)(B)(ii).\23\ Nor does this 
interpretation alter any statutory interpretation or statement of 
Commission policy relating to the forward contract exclusion.\24\
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    \21\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(bb).
    \22\ 7 U.S.C. 1a(27).
    \23\ 7 U.S.C. 1a(47)(B)(ii).
    \24\ See, e.g., Statutory Interpretation Concerning Forward 
Transactions, 55 FR 39188 (Sept. 25, 1990) (``Brent 
Interpretation'').
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    In the view of the Commission, the determination of whether 
``actual delivery'' has occurred within the meaning of new CEA section 
2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding 
delivery beyond the four corners of contract documents. This 
interpretation of the statutory language is based on Congress's use of 
the word ``actual'' to modify ``delivery'' and on the legislative 
history of new CEA section 2(c)(2)(D)(ii)(III)(aa) described above. 
Consistent with this interpretation of the statutory language, in 
determining whether actual delivery has occurred within 28 days of the 
date the agreement, contract, or transaction is entered into, the 
Commission will employ a functional approach and examine how the 
agreement, contract, or transaction is marketed, managed, and 
performed, instead of relying solely on language used by the parties in 
the agreement, contract, or transaction. This approach best 
accomplishes Congress's intent when it enacted section 742(a) of the 
Dodd-Frank Act and gives full meaning to Congress's term ``actual 
delivery.''
    Relevant factors in this determination include the following: 
Ownership, possession, title, and physical location of the commodity 
purchased or sold, both before and after execution of the agreement, 
contract, or transaction, including all related documentation; the 
nature of the relationship between the buyer, seller, and possessor of 
the commodity purchased or sold; and the manner in which the purchase 
or sale is recorded and completed. The Commission provides the 
following non-exclusive examples to illustrate how it will determine 
whether actual delivery has occurred within the meaning of new CEA 
section 2(c)(2)(D)(ii)(III)(aa). The Commission may also determine that 
actual delivery has occurred in circumstances beyond those described in 
the first two examples if it can readily determine within a reasonable 
period of time that the purported delivery is not simply a sham and 
that actual delivery has occurred within 28 days within the meaning of 
new CEA section 2(c)(2)(D)(ii)(III)(aa).

    Example 1:  Actual delivery will have occurred if, within 28 
days, the seller has: (1) Physically delivered the entire quantity 
of the commodity purchased by the buyer, including any portion of 
the purchase made using leverage, margin, or financing, into the 
possession of the buyer; and (2) has transferred title to that 
quantity of the commodity to the buyer.
    Example 2: Actual delivery will have occurred if, within 28 
days, the seller has: (1) Physically delivered the entire quantity 
of the commodity purchased by the buyer, including any portion of 
the purchase made using leverage, margin, or financing, whether in 
specifically segregated or fungible bulk form, into the possession 
of a depository other than the seller and its parent company, 
partners, agents, and other affiliates, that is: (a) A financial 
institution as defined by the CEA; (b) a depository, the warrants or 
warehouse receipts of which are recognized for delivery purposes for 
any commodity on a contract market designated by the Commission; or 
(c) a storage facility licensed or regulated by the United States or 
any United States agency; and (2) has transferred title to that 
quantity of the commodity to the buyer.\25\
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    \25\ Based on Examples 1 and 2, an agreement, contract, or 
transaction that results in ``physical delivery'' within the meaning 
of section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code 
would ordinarily result in ``actual delivery'' under new CEA section 
2(c)(2)(D)(ii)(III)(aa), absent other evidence indicating that the 
purported delivery is a sham. See Model State Commodity Code Sec.  
1.04(a)(2)(i)-(iii), Comm. Fut. L. Rep. Archive (CCH) ] 22,568 (Apr. 
5, 1985). Conversely, an agreement, contract, or transaction that 
does not result in ``physical delivery'' within the meaning of 
section 1.04(a)(2)(i)-(iii) of the Model State Commodity Code is 
highly unlikely to result in ``actual delivery'' under new CEA 
section 2(c)(2)(D)(ii)(III)(aa).
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    Example 3:  Actual delivery will not have occurred if, within 28 
days, a book entry is made by the seller purporting to show that 
delivery of the commodity has been made to the buyer and/or that a 
sale of a commodity has subsequently been covered or hedged by the 
seller through a third party contract or account, but the seller has 
not, in accordance with the methods described in Example 1 or 2, 
physically delivered the entire quantity of the commodity purchased 
by the buyer, including any portion of the purchase made using 
leverage, margin, or financing, and transferred title to that 
quantity of the commodity to the buyer, regardless of whether the 
agreement, contract, or transaction between the buyer and seller 
purports to create an enforceable obligation on the part of the 
seller, or a parent company, partner, agent, or other affiliate of 
the seller, to deliver the commodity to the buyer.
    Example 4:  Actual delivery will not have occurred if, within 28 
days, the seller has purported to physically deliver the entire 
quantity of the commodity purchased by the buyer, including any 
portion of the purchase made using leverage, margin, or financing, 
in accordance with the method described in Example 2, and transfer 
title to that quantity of the commodity to the buyer, but the title 
document fails to identify the specific financial institution, 
depository, or storage facility with possession of the commodity, 
the quality specifications of the commodity, the identity of the 
party transferring title to

[[Page 52429]]

the commodity to the buyer, and the segregation or allocation status 
of the commodity.
    Example 5:  Actual delivery will not have occurred if, within 28 
days, an agreement, contract, or transaction for the purchase or 
sale of a commodity is rolled, offset, or otherwise netted with 
another transaction or settled in cash between the buyer and the 
seller, but the seller has not, in accordance with the methods 
described in Example 1 or 2, physically delivered the entire 
quantity of the commodity purchased by the buyer, including any 
portion of the purchase made using leverage, margin, or financing, 
and transferred title to that quantity of the commodity to the 
buyer, regardless of whether the agreement, contract, or transaction 
between the buyer and seller purports to create an enforceable 
obligation on the part of the seller, or a parent company, partner, 
agent, or other affiliate of the seller, to deliver the commodity to 
the buyer.

    Issued in Washington, DC, on August 20, 2013, by the Commission.
Christopher J. Kirkpatrick,
Deputy Secretary of the Commission.

Appendix to Retail Commodity Transactions Under Commodity Exchange 
Act--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia, and Wetjen voted in the affirmative. No Commissioners voted 
in the negative.

[FR Doc. 2013-20617 Filed 8-22-13; 8:45 am]
BILLING CODE 6351-01-P