[Federal Register Volume 64, Number 168 (Tuesday, August 31, 1999)]
[Proposed Rules]
[Pages 47452-47461]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22555]


=======================================================================
-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 32


Trade Options on the Enumerated Agricultural Commodities

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: In April 1998, the Commodity Futures Trading Commission 
(Commission or CFTC) removed the prohibition on off-exchange trade 
options on the enumerated agricultural commodities subject to a number 
of regulatory requirements. The Commission has reconsidered several of 
these requirements with a view toward streamlining regulatory or 
paperwork burdens in order to increase agricultural trade option's 
commercial utility while maintaining basic customer protections. In 
particular, the Commission is proposing to streamline the registration 
requirements for Agricultural Trade Option Merchants (ATOMs) and their 
sales agents by, among other things, removing the training requirement 
for associated persons and limiting the number of principals that must 
certify that they are not subject to statutory disqualification from 
registration. In addition, the Commission is proposing to permit cash 
settlement and offset or cancellation of agricultural trade options, by 
removing the requirement that such options, if exercised, must result 
in physical delivery. The Commission is also proposing to eliminate the 
currently required transaction-specific disclosure statement and to 
revise the summary disclosure statement provided to customers when 
opening an account. The Commission is proposing to streamline certain 
reporting and recordkeeping requirements, as well.

DATES: Comments must be received by September 30, 1999.

ADDRESSES: Comments should be mailed to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, attention: Office of the Secretariat; transmitted by 
facsimile at (202) 418-5521; or transmitted electronically at 
[[email protected]]. Reference should be made to ``Agricultural Trade 
Options.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, 
(202) 418-5260, or electronically at [PA[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

    Generally, the offer or sale of commodity options is prohibited 
except on designated contract markets. 17 CFR 32.11. One of several 
specified exceptions to the general prohibition on off-exchange options 
is for ``trade options.'' Trade options are off-exchange options 
``offered by a person having a reasonable basis to believe that the 
option is offered to'' a person or entity within the categories of 
commercial users specified in the rule, where such commercial user ``is 
offered or enters into the commodity option transaction solely for 
purposes related to its business as such.'' 17 CFR 32.4(a). However, 
this exception from the general ban on off-exchange options does not 
apply to trade options on the agricultural commodities enumerated in 
the Commodity Exchange Act (Act).\1\ 7 U.S.C. 1a(3).
---------------------------------------------------------------------------

    \1\ In 1936, responding to a history of large price movements 
and disruptions in the futures markets attributed to speculative 
trading in options, Congress completely prohibited the offer or 
sales of option contracts both on and off exchange in the specific 
list of agricultural commodities enumerated in the Act. After its 
creation in 1974, the Commission promulgated a comprehensive 
regulatory framework applicable to off-exchange commodity option 
transactions in the non-enumerated commodities. This comprehensive 
framework exempted ``trade options'' from most of its provisions 
except for a rule prohibiting fraud (rule 32.9). In contrast, the 
prohibition on the offer and sale of all options on the enumerated 
agricultural commodities remained as a consequence of both statutory 
provision and Commission rule. The statutory bar was repealed as 
part of the Commission's reauthorization in 1982. Public Law No. 97-
444, 96 Stat. 2294, 2301 (1983). A full statement of the statutory 
and regulatory history is provided in the notice of final rulemaking 
promulgating the interim final rules. 63 FR 18821 (April 16, 1998).
---------------------------------------------------------------------------

    In April, 1998, the Commission promulgated interim final rules to 
permit the trading of agricultural trade options subject to various 
regulatory requirements. 63 FR 18821 (April 16, 1998). These 
requirements were designed to provide a number of customer protections. 
They included provisions for registration of ATOMs, disclosure of risks 
to option buyers, financial safeguards, and recordkeeping. In addition, 
option vendors were required to have a system of internal controls and 
to report to the Commission on their option activity. The rules also 
included a number of provisions to discourage the use of trade options 
for speculative purposes. These included the requirement that 
agricultural trade options, if exercised, be physically delivered, and 
limitations on producers granting options, including prohibiting 
producers from writing covered call options.
    No one has applied for registration as an ATOM since the interim 
rules went into effect in June, 1998. Reportedly, agricultural trade 
options are being offered to some extent pursuant to the rules' 
exemption for high net worth entities. However, because there are no 
reporting requirements for options offered pursuant to the exemption, 
the Commission cannot ascertain to what extent such options are being 
traded between exempt entities.
    The current lack of interest in offering these instruments could 
well be a result of the current depressed prices for many 
commodities.\2\ However, some observers have suggested a different 
explanation for the lack of interest in these instruments. Various 
agricultural groups have voiced concern that the interim

[[Page 47453]]

final rules are too onerous, thereby discouraging participation. 
Particular concerns have been raised that the registration, reporting 
and disclosure requirements are too burdensome and that certain of the 
restrictions on the form of options that producers may enter into limit 
their usefulness. These groups maintain that if the regulatory 
requirements were relaxed agricultural trade options would be offered 
more readily.
---------------------------------------------------------------------------

    \2\ In addition to low prices, lack of familiarity among many in 
the agricultural sector with risk management techniques generally 
and agricultural trade options, specifically, may also have hampered 
development of demand for trade option products. To address this, 
widespread educational efforts will be necessary to give producers a 
better understanding of what the instruments are and how to use them 
safely. To this end, the Commission recently released three 
educational pamphlets on agricultural trade options prepared by its 
Division of Economic Analysis. These pamphlets provide an overview 
of agricultural trade options and the rules for trading them. The 
first of these brochures, entitled ``Agricultural Trade Options--
What Agricultural Producers Need to Know,'' was issued in December 
1998. This brochure acquaints agricultural producers with how they 
can use agricultural trade options to manage risk. The second and 
third brochures, issued in February 1999, summarize how to become an 
agricultural trade option merchant and provide general information 
to lenders and extension agents, respectively. They are entitled 
``How to Become an Agricultural Trade Options Merchant,'' and 
``Agricultural Trade Options--Information for Lenders and Extension 
Agents.'' All three of these brochures are available on the 
Commission's website.
---------------------------------------------------------------------------

    In issuing the interim final rules, the Commission noted that the 
rules were an experiment and that the Commission ``has not foreclosed 
reconsideration of any specific issue.'' 62 FR 18823. In this regard, 
since the rules' promulgation, a number of groups have recommended the 
the Commission reconsider various aspects of the current rules. The 
Commission receives the views of a cross-section of the agricultural 
sector through its Agricultural Advisory Committee (AAC). The AAC, at 
its most recent meeting on April 21, 1999, heard presentations on the 
agricultural trade option rules by representatives of the National 
Grain and Feed Association (NGFA) and the National Introducing Brokers 
Association. AAC members then engaged in a detailed discussion of 
various possible rule alternatives and the policy issues that such 
alternatives would raise. Subsequently, nine organizations representing 
a broad cross-section of production agriculture submitted to the 
Commission their common views on these issues by letter dated April 23, 
1999.\3\
---------------------------------------------------------------------------

    \3\ These nine producer organizations include the: (1) American 
Farm Bureau Federation, (2) National Association of Wheat Growers, 
(3) National Corn Growers Association, (4) National Farmers Union; 
(5) National Pork Producers, (6) American Soybean Association, (7) 
National Cattlemen's Beef Association, (8) National Cotton Council 
of America, and (9) National Grain Sorghum Producers.
---------------------------------------------------------------------------

    The dialogue over the interm final rules has not resulted in a 
unified industry-wide view on recommended changes to those rules. 
Nevertheless, seven letters were submitted to the Commission 
recommending various changes. These include the April 23 letter from 
the nine producer organizations, a letter dated April 19, 1999 from the 
Farm Credit Council, a letter dated April 21, 1999, from the Illinois 
Farm Bureau, a letter dated June 15, 1999, from the NGFA, a letter 
dated June 16, 1999, from the Chicago Board of Trade (CBT), a letter 
dated July 9, 1999, from the National Grain Sorghum Producers and a 
letter dated August 9, 1999, from the American Farm Bureau Federation, 
the National Association of What Growers, the American Soybean 
Association and the National Farmers Union.\4\ Based in part on the 
various views expressed in these letters, the Commission is proposing a 
number of revisions to the interim final rules.
---------------------------------------------------------------------------

    \4\ In addition, various views concerning the interim final 
rules were expressed by participants in the United States Senate 
Agriculture, Nutrition and Forestry Committee's (Senate Agriculture 
Committee) roundtable to discuss futures, derivatives and related 
public policy issues held on February 25 and 26, 1999 and by 
witnesses at the committee's hearings to examine crop insurance and 
risk management strategies held on March 10 and 17, 1999.
---------------------------------------------------------------------------

II. Proposed Revisions to the Agricultural Trade Option Rules

    The Commission has reconsidered a number of the requirements of the 
agricultural trade option rules with a view toward maintaining their 
basic customer protection while increasing the commercial utility of 
the instruments or trading strategies permitted and streamlining 
regulatory or paperwork burdens. The Commission specifically revisited 
the particular rules relating to the registration requirements and 
procedures for ATOMs and their sales agents (associated persons or 
APs), whether physical delivery should be required upon exercise of the 
option, whether producers should be able to write call options, whether 
a different form of risk disclosure would be more appropriate and 
whether the $10 million exemptive level should be changed. The 
Commission also considered a number of additional revisions to reduce 
paperwork and reporting burdens or to bring certain contracting 
requirements into closer alignment with certain cash market practice. 
An analysis of each of these issues follows.

A. Registration

    The requirement that all market professions be registered, and the 
authority to approve or revoke registrations, is an important means of 
policing conduct in a market. The requirement that market professionals 
be registered gives the Commission an important tool for protecting 
customers. Registration of market professionals helps assure customers 
of the registrant's probity, and a testing or training requirement 
helps ensure a minimum level of competency. Every commodity 
professional, unless excluded or exempted, that deals with a member of 
the public is required to be registered with the Commission.
    As part of these customer protections, section 14 of the Act 
provides that ``any person complaining of any violation of any 
provision of this Act or any rule . . . issued pursuant to this Act by 
any person who is registered under this Act'' may bring a reparations 
action therefore the Commission. Accordingly, complaints that do not 
relate to violations of the Act or Commission rules are not subject to 
Commission reparations proceedings. A dispute arising solely out of a 
cash market transaction, therefore, would be dismissed and not be heard 
the Commission. See 17 CFR 12.26.
    By long-standing rule (17 CFR 180.3(b)(3)), the Commission does not 
permit a customer to waive the right to seek reparations through a 
predisute arbitration agreement. However, if the customer declines to 
institute reparations proceedings, the claim or grievance is subject to 
such a preexisting arbitration agreement.
    NGFA, in particular, supports an alternative means of qualification 
to offer or solicit agricultural trade options short of registration so 
that its members would not be subject to the Commission's reparations 
authority. NGFA provides an arbitration service to resolve cash grain 
contract disputes involving its members, and supports its members' 
right to require customers through account opening agreements to use 
NGFA arbitration as the sole means to resolve disputes involving 
agricultural trade options. In contrast, several producer organizations 
support the registration requirement as a means ``to protect customers 
and reduce the likelihood that unscrupulous individuals will qualify as 
agricultural trade options merchants'' preferring that ``a full range 
of dispute resolution options . . . remain available to contract 
participants ranging from arbitration under industry trade rules to 
CFTC reparations actions.'' See letter of April 23. See also letters of 
July 9 and August 9, 1999.
    It appears that there may be substantial public support for a 
registration requirement, both because of the higher level of customer 
protection it provides, and a desire to have available the Commission's 
reparations forum for dispute resolution. Although some sectors of 
agriculture may have well-regarded industry arbitration fora available, 
many do not. For these sectors, reparations may be the only readily 
available non-judicial avenue for dispute resolution. Accordingly, the 
Commission is retaining the registration requirement at this time. 
However, the Commission certainly would consider deleting the 
registration requirement in favor of a simple notification filing 
stating one's intent to enter into the trade option business if that 
alternative is preferred by those whom the regulations are

[[Page 47454]]

intended to protect. The Commission specifically invites comments on 
whether the registration requirement should be retained. \5\
---------------------------------------------------------------------------

    \5\ The Commission is also proposing to clarify the 
enforceability of pre-dispute arbitration clauses for agricultural 
trade options and the procedures by which customers can waive their 
right to use Commission reparations procedures to resolve disputes 
with an ATOM by incorporating into these rules streamlined 
procedures similar to those included in Commission Rule 180.3(b) 
which are applicable to other commodity professionals.
---------------------------------------------------------------------------

    Despite this fundamental disagreement over whether registration 
should be required, there is broad agreement that the registration 
procedures for ATOMs and their sales agents be streamlined and simple. 
Unlike other categories of registrants, under current rules an ATOM's 
principals and sales agents need not provide fingerprints or pass a 
proficiency test. In other respects the registration requirements are 
similar to those for other Commission registrants, including processing 
of registration applications by the National Futures Association (NFA), 
the requirement that each applicant certify that it is not disqualified 
from engaging in a commodity-related business under the statutory 
disqualification provisions of sections 8a(2) or 8a(3) of the Act and 
the requirement that an ATOM certify that, to the best of its 
knowledge, each of its associated persons meets the final rules' 
registration requirements. Those seeking registration as associated 
persons are required to complete six hours of instruction in the 
requirements of the Act and the rules thereunder, the economic 
functioning and risks of agricultural trade options, and the 
registrant's responsibility to observe just and equitable principles of 
trade relating to such options.
    The Commission is proposing to streamline registration of ATOMs and 
their APs by removing the requirement that ATOMs separately certify the 
truth of their principal's and APs' applications. The Commission also 
proposes to limit the principals required to file as part of an ATOM's 
application to those principals who exercise direct control over the 
ATOM's business affairs. For an ATOM that is part of a larger 
agribusiness, this should greatly lessen the number of principals who 
are required to file. This is because, unlike financial service 
companies that commonly use a holding company structure, many companies 
engaged in agriculture are structured as unitary corporations with 
separate operating divisions, potentially increasing the number of 
principals within the organization.
    The Commission is also proposing to delete the mandatory six hour 
training course for sales agents. The offer or sale of agricultural 
trade options is not expected to be the primary commercial activity for 
many, if not most ATOMs, increasing the relative burden of the 
mandatory training requirement. Instead, each ATOM would decide the 
amount and nature of training it will require of its sales agents, 
presumably based upon the nature of its trade option business.
    In addition, paperwork associated with the registration process 
could be streamlined by deleting the requirement that ATOMs notify the 
Commission when an associated person leaves its employ and a new 
associated person begins. Because many ATOMs may employ individuals 
well-known in their local communities, such filings may be less 
necessary. On the other hand, staff turnover at such locations would 
tend to be low, reducing the burden of filing updates on affiliated 
staff. Some ATOMs may employ widely dispersed sales forces and may 
prefer to have a means of providing public notice of their officially 
authorized sales agents through such updates. Accordingly, the 
Commission is not now proposing to delete the requirement that ATOMs 
notify the NFA when an associated person leaves its employ or is hired. 
However, it specifically requests commenters to address the relative 
burden and benefits of this requirement.
    Finally, NGFA, in particular, suggests that the Commission directly 
process applications for registration as an ATOM or an AP of an ATOM, 
an administrative task that the interim final rules delegate to the 
National Futures Association. 17 CFR 3.13(e). NGFA suggests that, ``it 
is inappropriate to involve the NFA in any form of `registration' 
process. . . . The NFA is a self-regulatory agency for futures, not 
cash markets.'' However, the interim final rules strictly limit NFA's 
role. NFA does not become a self-regulatory authority for ATOMs simply 
by administratively processing their registration applications on the 
Commission's behalf. NFA exercises no regulatory authority over the 
offer or sale of agricultural trade options by ATOMs as a consequence 
of that administrative function, nor do ATOMs or their APs thereby 
become members of NFA.\6\
---------------------------------------------------------------------------

    \6\ This is similar to floor brokers and floor traders, whose 
registration applications are processed by NFA but who do not become 
NFA members and are not regulated by NFA. Rather, they are generally 
governed by the exchanges that have granted them trading privileges.
    Moreover, NFA arbitration is only available for the resolution 
of disputes involving NFA members. Accordingly, NFA arbitration 
would not be available to ATOMs and their customers.
---------------------------------------------------------------------------

    Moreover, the Commission faces a number of challenges in directly 
processing applications for registration of ATOMs and their APs. The 
Commission completely transferred this administrative function to NFA 
during the 1980s and no longer has systems in place to process this 
type of registration application. Accordingly, the Commission would 
have to rebuild this capability from the ground up before it could 
begin reviewing and approving registrations once again. Moreover, 
rebuilding such administrative systems would, in the short-run, compete 
for technical resources that are being devoted to Y2K compliance. In 
contrast, NFA can process these additional categories of registrants 
with only minor changes to its existing systems.
    In light of the above, the Commission requests comment on the 
possible benefits to ATOMs, their APs or potential customers from the 
Commission's direct processing of registration applications, and the 
relative cost of such a proposal, including the indirect costs caused 
by the increased implementation time needed by the Commission to 
reestablish this administrative capability.

B. Physical Delivery

    The interim rules prohibit agricultural trade options from being 
off-set, and require that if exercised, agricultural trade options 
result in physical delivery of the underlying commodity. The interim 
rules, however, permit substitution of a forward contract agreement 
prior to the option's expiration. Commission Rule 32.13(a)(3). This 
provision, by requiring agricultural trade options explicitly to serve 
a merchandising function, helps assure a close relationship between the 
agricultural trade option transaction and the producer's cash market 
activities. It also helps to assure that such options would be 
transacted between those having pre-existing cash market relationships 
and that their functioning would likely be easily understood. See, 63 
FR at 59627.
    Support is widespread among all sectors of agriculture for some 
permitted types of cash settlement, offset or cancellation of 
agricultural trade options.\7\ The bar on cash settlement/

[[Page 47455]]

offset was adopted, in part, to discourage speculative use of 
agricultural trade options by purchasers and as a means of limiting 
vendors to entities with a strong, on-going connection to the cash 
markets. On the other hand, observers have suggested many situations 
when cash settlement/offset would be consistent with sound business 
practice, such as when hail wipes out a producer's ability to deliver 
on an option having time-value remaining or when localized conditions 
may make delivery at an alternate location relatively more attractive. 
Others have suggested that more highly engineered option products can 
be offered only if cash-settlement is permitted.
---------------------------------------------------------------------------

    \7\ Unlike forward contracts which are commercial, merchandizing 
transactions resulting in delivery, options can be settled in a 
number of ways. For example, various exchange-traded options may be 
settled through the delivery of a futures position, delivery of a 
commodity such as gold, or the payment of the option's value based 
upon a reference price such as the London gold fix. Cash settlement 
of a trade option differs from physical delivery on the option in 
that the option's holder, upon exercise, is paid the option's value 
rather than delivering the commodity at the strike price specified 
in the option contract.
---------------------------------------------------------------------------

    Some observers have suggested that the Commission permit cash 
settlement/offset of agricultural trade options only as a one-time 
alternative to delivery. Although such a requirement would discourage 
speculation, it could be easily evaded simply by establishing a new 
option position with a second vendor or by identifying a new option as 
covering additional production capacity. In light of the obvious 
enforcement difficulties in enforcing a one-time cash-settlement rule 
and the likelihood that other regulatory provisions, such as the 
registration of ATOMs and the requirement that ATOMs be commercials, to 
some degree would discourage unscrupulous entities from offering, and 
purchasers from buying, agricultural trade options merely for 
speculative purposes, the Commission is proposing simply to remove the 
requirement that agricultural trade options, if exercised, result in 
physical delivery.\8\
---------------------------------------------------------------------------

    \8\ Although Rule 32.13(a) requires that an ATOM be a commercial 
involved in the production, processing or handling of the underlying 
commodity, the interim final rules did not limit eligibility to 
become an ATOM to a commodity's first handler. Nevertheless, 
permitting cash settlement likely will enable a greater variety of 
commercial enterprises engaged in agriculture to offer these 
contracts. The Commission therefore is proposing to clarify that 
eligible commercial enterprises include those selling inputs used in 
the production of the commodity as well as banks that routinely 
finance businesses involved in the production, processing or 
handling of the commodity.
---------------------------------------------------------------------------

    However, the Commission is proposing to require ATOMs to provide 
customers with an account statement following the termination, 
cancellation, cash settlement or amendment of an option's expiration 
date (rolling the contract). Customers could have expected to have 
their accounts settled upon physical delivery, and this proposed 
requirement will ensure that customers who cash settle their contracts 
are provided with similar information.\9\ Moreover, by receiving an 
accounting and knowing with certainty the outcome of their closed 
position, customers should better be able to ascertain the potential 
outcome of entering into a subsequent transaction. In addition, the 
Disclosure Statement continues to advise potential purchasers that 
trade options are required to have a business purpose and are not to be 
used for speculation.
---------------------------------------------------------------------------

    \9\ For example, if a customer initially purchases an option for 
$1000 and later offsets that option by selling the option back to 
the ATOM for $500, the customer will have to be notified that the 
purchase and resale of the option netted a $500 loss. This rule 
would have the effect of keeping customers informed of any losses 
incurred on option trades and discourage them from ``speculating on 
account.''
---------------------------------------------------------------------------

C. Risk Disclosure, Customer Account Information and Reports to the 
Commission

    The interim final rules mandate that customers be provided with 
both a general, summary disclosure statement upon opening an account 
and transaction-specific disclosures before entering into a specific 
transaction. Commission Rules 32.13(a) (7) and (8). The transaction-
specific disclosure includes information relating to the specific terms 
of a particular transaction. The ATOM is required to disclose the 
customer's worst possible financial outcome when the option premium is 
not collected up front or when an option contract is amended.
    There is general agreement among representatives of both potential 
vendors and customers that the risk disclosure mandated by the interim 
final rules should be streamlined and made administratively simpler by 
eliminating the transaction-specific disclosure statement. Many of the 
transaction-specific disclosures could be made in the summary 
disclosure statement. Others may be readily ascertainable from the face 
of the option contract itself. The CBT suggested that the existing 
statement regarding the availability of exchange-traded options 
offering greater regulatory and financial protections be enhanced to 
state explicitly that the trade option is not guaranteed in any way by 
a contract market.
    The Commission is proposing to eliminate the transaction-specific 
disclosure statement and to revise the summary disclosure to include 
some of the deleted material. For example, the Commission is proposing 
to add a paragraph to the summary disclosure statement advising 
customers to understand each option's procedure for exercise, time of 
expiration, cost (including the amount of, and method of paying, the 
premium) and associated fees. In addition, as noted above, the 
Commission is proposing that before the expiration date of a contract 
is amended the customer be given a current account statement. This is 
in lieu of the worst-case outcome disclosure which is currently 
required. A current account statement will provide the information 
necessary for the customer to determine the possible financial outcome 
resulting from the contract's amendment.
    In addition, the Commission is proposing to amend the requirements 
relating to reporting of account information to customers. A number of 
sources, including several state-level representatives of producers and 
commodity first-handlers, suggested that the requirements that ATOMs 
provide customers with account-related information potentially created 
too great a paperwork burden for smaller firms. Specifically, Rule 
32.13(b) requires ATOMs to provide customers with written confirmation 
of contracts within 24 hours of execution and within 48 hours of a 
customer request, a written response regarding the customer's account 
or position. In addition, ATOMs are required to notify customers in 
writing of an option's expiration within the coming calendar month. 
This requirement was intended to assist customers in managing their 
option positions and, in particular, to ``provide customers with notice 
sufficient to reduce the occasions on which customers permit in-the-
money options to expire due to inattention.'' 63 FR 18828.
    Representatives of agricultural organizations opined that many of 
the required writings would be required during harvest time, when 
smaller businesses, including producers, would prefer the immediacy of 
telephonic communication over written notice. Accordingly, the 
Commission is proposing to increase the ATOM's flexibility in meeting 
these requirements by permitting oral communications and notice to 
customers.\10\
---------------------------------------------------------------------------

    \10\ The Commission also is proposing to delete the requirement 
that the ATOM provide the option purchaser with a separate written 
confirmation. Elsewhere, the Commission is requiring that an 
executed copy of the written contract or a written confirmation of 
oral contracts be provided to the customer. Accordingly, a separate 
confirmation is redundant.

---------------------------------------------------------------------------

[[Page 47456]]

    Similarly, some have observed that oral contracting is still the 
prevailing means of transacting business in certain agricultural cash 
markets, and they suggests that the interim rules, which require 
agricultural trade option contracts to be written, should be amended to 
reflect that reality. In this regard, state law has recognized this 
practice by recognizing the validity of such oral contracts when they 
have been confirmed in writing. The Commission is proposing to amended 
its rules to recognize this practice. However in doing so, the 
Commission is requiring that the written confirmation, which must be 
signed by the ATOM, include all material terms of the option contract. 
In this way, option contracts can be made over the telephone, as are 
cash forward contracts, and both ATOMs and customers will be certain of 
the contract's terms, thereby reducing potential disputes between the 
parties over vaguely defined contract terms.\11\
---------------------------------------------------------------------------

    \11\ As the Commission explained in its notice of proposed 
rulemaking, the ``lack of written terms and conditions in [hedge-to-
arrive] contracts led to widespread disagreement among parties over 
the terms of the instruments, complicating the resolution of various 
issues.''
---------------------------------------------------------------------------

    In addition, there has been widespread support among agricultural 
groups for reducing ATOMs' required reports. The interim rules require 
ATOMs to file reports on volume and open interest four times a year 
with the NFA. Many claim that such a filing requirement would be 
onerous on small ATOMs that do not have staffs dedicated only to back 
office operations. In this regard, they note that one of the quarterly 
filings would be due during harvest, a time when smaller business are 
stretched thin and may have no available staff to compile such a 
report. They further maintain that lacking programming support, such 
reports would often have to be compiled manually. In addition, they 
prefer that such reports be filed with the Commission rather than the 
NFA, an organization in which they are not members. The Commission is 
proposing to reduce periodic reporting to one annual report, filed by 
the ATOM with the Commission within 90 days of the end of its fiscal 
year.\12\ In that way, the report can be generated as one more step in 
the year-end closing of an ATOM's routine business accounts.
---------------------------------------------------------------------------

    \12\ Unlike the processing of registrations which has been 
delegated to the NFA and for which the Commission has no existing 
systems capability, the Commission has an extensive reporting system 
on which to build this reporting requirement. Accordingly, it would 
not be an undue or an unreasonable administrative burden for the 
Commission to undertake direct administration of the reporting 
requirement. Moreover, the Commission and not the NFA would be the 
primary user of the information reported. For these reasons, the 
Commission is proposing to revise the requirement to provide that 
ATOMs file their annual reports directly with the Commission.
---------------------------------------------------------------------------

    This yearly report obviously will provide the Commission with less 
information. However, it will provide an overall picture of the 
industry over time. Moreover, the Commission is retaining authority to 
obtain information as needed for regulatory purposes through 
inspections of the books and records of a particular firm, as needed. 
In addition, the Commission will likely conduct a market-wide survey, 
by special call, in order to evaluate the success of the rules. The 
information that would be required in a special call is specified in 
the rules.\13\
---------------------------------------------------------------------------

    \13\ The Commission is also proposing to revise the requirement 
that, except for funds used to purchase exchange-traded contracts as 
cover, ATOMs keep in segregation 100% of customer funds paid up 
front. In its rules governing the off or sale of dealer options, 
another type of over-the-counter option, the Commission required the 
option grantor to hold not less than 90% of funds paid by a customer 
in segregation (17 CFR 32.6(a)). The Commission is proposing to 
apply that practice to agricultural trade options, as well. This 
will provide ATOMs greater flexibility in structuring their 
business.
---------------------------------------------------------------------------

D. Required Contract Terms and Limitations on Certain Strategies

    As noted above, one cause of a number of disputes involving hedge-
to-arive contracts was inadequate of vague contract specifications. To 
avoid a similar problem with agricultural trade options, Commission 
Rule 32.13(a)(6) requires that an agricultural trade option specify a 
number of contract terms, including the procedure for exercise, the 
expiration date and latest time on that date for exercise; the strike 
price; the total quantity of the commodity underlying the option; the 
quality or grade of commodity to be delivered if the option is 
exercised and any adjustments to price for deviations from stated 
quality or grade, or the range of, and a statement of the method for 
calculating such adjustments; the delivery location; the elements 
comprising the purchase price to be charged, including the premium, 
mark-ups on the premium, costs, fees and other charges; and additional 
costs, if any, which may be incurred if the commodity option is 
exercised. Commission Rule 32.13(a)(6)(i)-(vii). These terms would be 
expected to be found in any fully-specified physical delivery option 
contract.
    However, representatives of some agricultural first handlers have 
objected to these requirements, arguing that they are overly 
restrictive, reducing an ATOM's ability to engineer instruments that 
offer greater flexibility to producers. One example given is the 
requirement that the option specify a delivery location and adjustments 
from par value. Although it is not clear to what degree these 
requirements actually would restrict an ATOM's design creativity, the 
current rules would have to be amended substantially to make conforming 
changes providing for cash settled options. Accordingly, and in light 
of the fact that even in the absence of the current rule options would 
ordinarily include the above terms, the Commission is proposing to 
delete this rule as a separate design requirement on ATOMS. Instead, 
the Commission is proposing to include in the Disclosure Document a 
statement that option customers should be sure that the contract 
includes, and that the customer understands the operation of, all of 
the above contract provisions.
    Another common source of dispute involving hedge-to-arrive 
contracts involved situations where customers were the grantors or 
writers of call options. In return for the premium income paid to 
enhance their current grain prices, customers granted elevators the 
right to demand delivery in the future of grain that the producer did 
not yet own. Many producers entering into these transactions appear not 
to have fully understood the transaction's risk. Accordingly, the 
interim rules permit call writing by producers only to the extent the 
written call is paired with a purchased or long put option in a window 
or fence strategy. Some observers have suggested that producers, if 
they desire, should be able to grant or write call options if the 
position is covered by expected production. However, this position is 
not riskless. For example, if the producer suffers a production 
shortfall or loss, the producer's liability could be significant. For 
this reason, many of the producer representatives opposed changing the 
interim rules in this respect. The Commission, therefore, is not now 
proposing to change the prohibition against writing covered calls. In 
taking this position, the Commission is not ruling out its 
reconsideration after producers have had an opportunity to gain 
experience generally with the offer and sale of trade options.

E. Exemption Level for Sophisticated Entities

    The interim rules exempt transactions in which each party to the 
option contract has a net worth of not less than $10 million from 
compliance with all of the specific conditions for trading agricultural 
trade options. Commission

[[Page 47457]]

Rule 32.13(g). The Commission determined that the exemption should 
apply only to those entities with a very high net worth and that a 
greater level of regulatory protection was appropriate for transactions 
involving less well-financed entities. In particular, the Commission 
was of the view that ``only the larger and better financed entities 
will consistently have available the legal and financial resources 
needed to protect their interests in an unregulated environment.'' 62 
FR 59634.
    While some in the agricultural community support lowering the 
exemption level, others oppose a lower exemption or even any exemption 
at all. NGFA, in particular, has argued that a lower exemption level 
``. . . would permit greater creativity to the market to more 
thoroughly assess what forms of agricultural trade options are most 
likely to be useful and successful for both buyers and sellers'' and 
``. . . would permit wholesale, or secondary markets for certain forms 
of agricultural trade options to develop.'' See letter of June 15, 
1999. Those opposing a lower exemption level fear that a lower 
exemption level ``will create a competitive inequity across the 
merchandizing sector.'' These organizations instead favor increasing 
participation in regulated transactions by making them more user-
friendly through the across-the-board revisions that the Commission is 
proposing. In light of the lack of consensus to lower the exemption 
level and the very broad changes to the rules being proposed, the 
Commission is not proposing to reduce the current exemption level.

III. Other Matters

A. Paperwork Reduction Act (PRA)

    When publishing proposed rules, the PRA of 1995 (Pub. L. 104-13 
(May 13, 1996)) imposes certain requirements on federal agencies 
(including the Commission) in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. In 
compliance with the Act, the Commission, through this rule proposal, 
solicits comments to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including the validity of the methodology and assumptions 
used. (2) Evaluate the accuracy of the agency's estimate of the burden 
of the proposed collection of information including the validity of the 
methodology and assumptions used. (3) Enhance the quality, utility, and 
clarity of the information to be collected. (4) Minimize the burden of 
the collection of the information on those who are to respond, 
including through the use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology; e.g., permitting electronic submission of 
responses. The Commission has previously received approval from OMB for 
the collection of information related to off-exchange agricultural 
trade options, which OMB designated as information collection 2028-
0048. The approved burden associated with 3038-0048 is as follows:
    Average burden hours per response: 5.420.
    Number of respondents per year: 3,610.
    Frequency of response: Quarterly and on occasion.
    The Commission has submitted the proposed agricultural trade 
options rules and amendments of OMB for approval. The proposed rules 
would change the burden as follows:
    Average burden hours per response: 5.59.
    Number of respondents per year: 3,605.
    Frequency of response: Annually and on occasion.
    Persons wishing to comment on the information that would be 
required by this proposed/amended rule should contact the Desk Officer, 
CFTC, Office of Management and Budget, Room 10202, NEOB, Washington, DC 
20503, (202) 395-7340. Copies of the information collection submission 
to OMB are available from the CFTC Clearance Officer, 1155 21st Street, 
NW, Washington, DC 20581, (202) 418-5160.

B. Regulatory Flexibility Act (RFA)

    The RFA, 5 U.S.C. 601 et seq., requires that agencies, in proposing 
rules, consider the impact of those rules on small businesses. The 
Commission has not previously determined whether all or some 
agricultural trade option merchants should be considered ``small 
entities'' for purposes of the RFA and, if so, to analyze the economic 
impact on such entities. However, the Commission is proposing that one 
of the conditions for registration as an agricultural trade option 
merchant is maintenance of a minimum level of net worth. The Commission 
previously found that other entities which were required to maintain 
minimum levels of net capital were not small entities for purposes of 
the RFA. See, 47 FR 18618, 18619 (April 30, 1982).
    The Commission has also found, however, that one category of 
Commission registrant--introducing brokers (IBs)--which is required to 
maintain a minimum level of net capital, may include small entities for 
purposes of the RFA. Nevertheless, in addition to the $50,000 minimum 
net worth required for registration as an agricultural trade option 
merchant, such registrants must be in business in the underlying cash 
commodity. This will require that they have additional resources 
invested in order to qualify as an agricultural trade option merchant, 
in contrast to an IB whose additional investment beyond the minimum net 
capital may be relatively small. For this reason, the Commission 
believes that agricultural trade option merchants are more 
appropriately treated as not being small entities under the RFA.
    The Chairman, on behalf of the Commission, hereby certifies, 
pursuant to 5 U.S.C. 605(b), that the action taken herein will not have 
a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the proposed 
rules will revise rules removing a complete ban on the offer or sale of 
trade options on the agricultural commodities enumerated under the Act. 
The proposed rules permitting such transactions subject to the 
specified conditions therefore remove a burden for all entities, 
regardless of size.

List of Subjects

17 CFR Part 3

    Administrative practice and procedure, Brokers, Commodity futures.

17 CFR Part 32

    Commodity futures, Commodity options, Prohibited transactions, 
Trade options.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, and in particular sections 2(a)(1)(A), 4c, and 
8a, 7 U.S.C. 2, 6c, and 12A, as amended, the Commission hereby proposes 
to amend parts 3 and 32 of chapter I of title 17 of the Code of Federal 
Regulations as follows:

PART 3--REGISTRATION

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

    Authority: 7 U.S.C. 1a, 2, 4, 4a, 6, 6b, 6c, 6e, 6f, 6g, 6h, 6i, 
6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21, 
23; 5 U.S.C. 552, 552b.

    2. Section 3.13 is proposed to be revised to read as follows:


Sec. 3.13  Registration of agricultural trade option merchants and 
their associated persons.

    (a) Definitions. (1) Agricultural trade option merchant. 
``Agricultural trade option merchant'' means any person that is in the 
business of soliciting,

[[Page 47458]]

offering to enter into, entering into, confirming the execution of, or 
maintaining a position in, transactions or agreements in interstate 
commerce which are not conducted or executed on or subject to the rules 
of a contract market, and which are or are held out to be of the 
character of, or are commonly known to the trade as, an ``option,'' 
``privilege,'' ``indemnity,'' ``bid,'' ``offer,'' ``put,'' ``call,'' 
``advance guarantee,'' or ``decline guarantee,'' involving wheat, 
cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill 
feeds, butter, eggs, solanum tuberosum (Irish potatoes), wool, wool 
tops, fats and oils (including lard, tallow, cottonseed oil, peanut 
oil, soybean oil and all other fats and oils), cottonseed meal, 
cottonseed, peanuts, soybeans, soybean meal, livestock, livestock 
products, and frozen concentrated orange juice. Provided, however, that 
any person entering into such transactions solely for the purpose of 
managing the risk arising from the conduct of his or her own commercial 
enterprise is not considered to be in the business described in this 
paragraph.
    (2) Associated person of an agricultural trade option merchant. 
``Associated person of an agricultural trade option merchant'' means a 
partner, employee, or agent (or any person occupying a similar status 
or performing similar functions) that:
    (i) Solicits or accepts customers' orders (other than in a clerical 
capacity) or
    (ii) Supervises any person or persons so engaged.
    (b) Registration required. It shall be unlawful for any person in 
the business of soliciting, offering or selling the instruments listed 
in Sec. 32.2 of this chapter to solicit, to offer to enter into, or to 
enter into, to confirm the execution of, or to maintain transactions in 
such instruments or to supervise persons so engaged except if 
registered as an agricultural trade option merchant or as an associated 
person of such a registered agricultural trade option merchant under 
this section.
    (c) Duration of registration. (1) A person registered in accordance 
with the provisions of this section shall continue to be registered 
until the revocation or withdrawal of registration.
    (2) Agricultural trade option merchants must notify the National 
Futures Association within twenty days when an associated person has 
ceased to be so associated.
    (3) An associated person who ceases to be associated with a 
registered agricultural trade option merchant is prohibited from 
engaging in activities requiring registration under Sec. 32.13 of this 
chapter or representing himself or herself to be a registrant until:
    (i) A registered agricultural trade option merchant notifies the 
National Futures Association of the person's association; and
    (ii) The associated person certifies to the National Futures 
Association that he or she is not disqualified from registration for 
the reasons listed in section 8a (2) and (3) of the Act; Provided, 
however, no such certification is required when the associated person 
becomes associated with the new agricultural trade option merchant 
within ninety days from when the associated person ceased the previous 
association.
    (d) Conditions for registration. (1) Applicants for registration as 
an agricultural trade option merchant must meet the following 
conditions:
    (i) The agricultural trade option merchant must have and maintain 
at all times net worth of at least $50,000 computed in accordance with 
generally accepted accounting principles;
    (ii) The agricultural trade option merchant must identify each of 
the natural persons who controls or directs the offer or sale of trade 
options or associated trading activity by the agricultural trade option 
merchant or who supervises any associated person of the agricultural 
trade option merchant and each such natural person must certify that he 
or she is not disqualified from registration for the reasons listed in 
sections 8a(2) and (3) of the Act; and
    (iii) The agricultural trade option merchant must provide access to 
any representative of the Commission of the U.S. Department of Justice 
for the purpose of inspecting books and records.
    (2) Applicants for registration as an associated person of an 
agricultural trade option merchant must meet the following conditions. 
Such persons must:
    (i) Identify the agricultural trade option merchant with whom the 
person is associated or to be associated within thirty days of the 
person's registration; and
    (ii) Certify that he or she is not disqualified from registration 
for the reasons listed in sections 8a(2) and (3) of the Act.
    (e) Applications for registration. (1) The agricultural trade 
option merchant, including its principals, and associated persons of an 
agricultural trade option merchant must apply for registration on the 
appropriate forms specified by the National Futures Association and 
approved by the Commission, in accordance with the instructions 
thereto, including the separate certifications from each natural person 
that he or she is not disqualified for any of the reasons listed in 
sections 8a(2) and (3) of the Act and such other identifying background 
information as may be specified.
    (2) The agricultural trade option merchant's application must also 
include its most recent annual financial statements certified by an 
independent certified public accountant in accordance with generally 
accepted auditing standards prepared within the prior 12 months.
    (3) These applications must be supplemented to include any changes 
in the information required to be provided thereon on a form specified 
by the National Futures Association and approved by the Commission.
    (f) Withdrawal of application for registration; denial, suspension 
and revocation of registration. The provisions of Secs. 3.51, 3.55, 
3.56 and 3.60 shall apply to applicants for registration and 
registrants as agricultural trade options merchants and their 
associated persons under this part 3 as though they were an applicant 
or registrant in any capacity under the Act.
    (g) Withdrawal from registration. An agricultural trade option 
merchant that has ceased or has not commenced engaging in activities 
requiring registration may withdraw from registration 30 days after 
notifying the National Futures Association on the specified form of its 
intent to do so, unless otherwise notified by the Commission. Such a 
withdrawal notification must include information identifying the 
location of, and the custodian authorized to release, the agricultural 
trade option merchant's records, a statement of the disposition of 
customer positions, cash balances, securities or other property and a 
statement that no obligations to customers arising from agricultural 
trade options remain outstanding.
    (h) Dual registration of associated persons. An associated person 
of an agricultural trade option merchant may be associated with other 
registrants subject to the provision of Sec. 3.12(f).
    3. Section 3.14 is proposed to be removed and reserved.

PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS

    4. The authority citation for part 32 continues to read as follows:

    Authority: 7 U.S.C. 2, 6c and 12a.

    5. Section 32.2 is republished for the convenience of the reader:

[[Page 47459]]

Sec. 32.2  Prohibited transactions.

    Notwithstanding the provisions of Sec. 32.11, no person may offer 
to enter into, confirm the execution of, or maintain a position in, any 
transaction in interstate commerce involving wheat, cotton, rice, corn, 
oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, 
solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils 
(including lard, tallow, cottonseed oil, peanut oil, soybean oil and 
all other fats and oils), cottonseed meal, cottonseed, peanuts, 
soybeans, soybean meal, livestock, livestock products, and frozen 
concentrated orange juice if the transaction 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,'' ``put,'' ``call,'' 
``advance guarantee,'' or ``decline guarantee,'' except as provided 
under Sec. 32.13 of this part.
    6. Section 32.13 is proposed to be revised to read as follows:


Sec. 32.13  Exemption from prohibition of commodity option transactions 
for trade options on certain agricultural commodities.

    (a) The provisions of Sec. 32.11 shall not apply to the 
solicitation or acceptance of orders for, or the acceptance of money, 
securities or property in connection with, the purchase or sale of any 
commodity option of a physical commodity listed in Sec. 32.2 by a 
person who is a producer, processor, or commercial user of, or a 
merchant handing or selling inputs used in the production of, the 
commodity which is the subject of the commodity option transaction, or 
the products or byproducts thereof, or a bank routinely engaged in the 
financing of such businesses, if all of the following conditions are 
met at the time of the solicitation or acceptance:
    (1) That person is registered with the Commission as an 
agricultural trade option merchant and that person's associated persons 
and their supervisors are registered as associated persons of an 
agricultural trade option merchant under Sec. 3.13 of this chapter.
    (2) The option offered by the agricultural trade option merchant 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 byproducts thereof, and such producer, 
processor, commercial user, or merchant is offered of enters into the 
commodity option transaction soley for purposes related to its business 
as such.
    (3) [Reserved]
    (4) To the extent that payment by the customer of the purchase 
price is made to the agricultural trade option merchant prior to option 
expiration or exercise, that amount:
    (i) May only be used by the agrciultural trade option merchant to 
purchase a covering position on a contract market designated under 
section 6 of the Act or part 33 of this chapter; and
    (ii) Any amount not so used shall be treated as belonging to the 
customer until option expiration or exercise as provided under and in 
accordance with Sec. 32.6 of this part.
    (5) Producers may not:
    (i) Grant or sell a put option; or
    (ii) Grant or sell a call option, except to the extent that such a 
call option is purchased or combined with a purchased or long put 
option position, and only to the extent that the customer's call option 
position does not exceed ghe customer's put option position in the 
amount to be delivered. Provided, however, that the option must be 
entered into simultaneously and expire simultaneously or at any time 
that one or the other option is exercised.
    (6) All option contracts, including all terms and conditions, 
offered or sold pursuant to this section shall be in writing, a signed 
copy of which shall be provided to the customer, of if the contract is 
verbal, it shall be confirmed in a writing which includes all terms and 
conditions, signed by the agricultural trade option merchant, and 
provided to the customer within 48 hours.
    (7) Prior to the entry by a customer into the first option 
transaction with an agrcultural trade option merhant, the agrciultural 
trade option merchant shall furnish, through written or electronic 
media, a summary disclosure statement to the option customer. The 
summary disclosure statement shall include:
    (i) The following statements in boldface type on the first page(s) 
of the summary disclosure statement:

    This brief statement does not disclose all of the risks and 
other significant aspects of trading in community trade options. You 
are encouraged to seek out as much information as possible from 
sources other than the person selling you this option about the use 
and risks of option contracts before entering into this contract. 
The issuer of your option should be willing and able to answer 
clearly any of your questions.

Appropriateness of Option Contracts

    Option contracts may result in the total loss of any funds you 
pay to the issuer of your option. You should carefully consider 
whether trading in such instruments is appropriate for you in light 
of your experience, objectives, financial resources and other 
relevant circumstances. The issuer of your option contract should be 
willing and able to explain the financial outcome of your option 
contract under different market conditions. You should also be aware 
that this option is not issued by, guaranteed by, or traded on or 
subject to the rules of a futures exchange. You may be able to 
obtain a similar contract or execute a similar risk management 
strategy using an instrument traded on a futures exchange which 
offers greater regulatory and financial protections.

Costs and Fees Associated With an Option Contract

    Before entering into an option contract, you should understand 
all of the costs associated with it. These include the option 
premium, commissions, fees, costs associated with delivery if the 
option requires settlement by delivery upon its exercise and any 
other charges which may be incurred. All of these costs and fees 
must be specified in the terms of your option contract.

Know and Understand the Terms of the Option Contract

    Before entering into an option contract, you should know and 
understand all of the option contract's terms. All of the option 
contract's terms should be included in the written contract, or for 
a verbal agreement, in a written confirmation. You should receive a 
signed copy of either the written contract or of the written 
confirmation. Your option contract should include contract terms 
setting:
    (A) The total quantity of commodity underlying the option 
contract;
    (B) The strike price(s) of the option contract;
    (C) The procedure for exercise of the option contract, including 
when you can exercise and the latest time and date for exercise;
    (D) Whether the option can be off-set or canceled prior to 
expiration;
    (E) Whether settlement of the option is for cash or by delivery 
of the commodity;
    (F) If settlement is by delivery, the delivery location or 
locations, the quality or grade of commodity to be delivered and how 
adjustments to price for deviations from stated quality or grade are 
determined;
    (G) If settlement is by cash, the method for determining the 
cash-settlement price; and
    (H) The cost and method of payment.

Business Use of Trade Options

    In order to comply with the law, you must be buying this option 
for business-related purposes. The terms and structure of the 
contracts must therefore relate to your activity or commitments in 
the underlying cash market. Any amendments allowed to the option 
contract or its cancellation or off-set prior to its expiration date 
must reflect changes in your activity, in your commitments in the 
underlying cash market or in the carrying of inventory. Producers 
are not permitted to enter into short call options unless the 
producer also enters into a long put option contract for the same 
amount or more of the commodity, at the same time and with the same 
expiration date. Producers are not permitted to sell put options, 
whether alone or in combination with a call option.

[[Page 47460]]

Dispute Resolution

    If a dispute should arise under the terms of this trade option 
contract, you have the right to choose to use the reparations 
program run by the Commodity Futures Trading Commission or any other 
dispute resolution forum provided to you under the terms of your 
customer agreement or by law. For more information on the 
Commission's Reparations Program contact: Office of Proceedings, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 
21st Street, NW., Washington, DC 20581, (202) 418-5250.

Acknowledgment of Receipt

    The Commodity Futures Trading Commission requires that all 
customers receive and acknowledge receipt of this disclosure 
statement. The Commodity Futures Trading Commission does not intend 
this statement as a recommendation or endorsement of agricultural 
trade options. These commodity options have not been approved or 
disapproved by the Commodity Futures Trading Commission, nor has the 
Commission passed upon the accuracy or adequacy of this disclosure 
statement. Any representation to the contrary is a violation of the 
Commodity Exchange Act and Federal regulations.
    (ii) The following acknowledgment section:

    I hereby acknowledge that I have received and understood this 
summary risk disclosure statement.
----------------------------------------------------------------------
Date.

----------------------------------------------------------------------
Signature of Customer.

    (8) An agricultural trade option merchant may not require a 
customer to waive the right to seek reparations under section 14 of the 
Act and part 12 of this chapter by an agreement or understanding to 
submit a claim or grievance to a specified settlement procedure prior 
to the time a claim or grievance arises. An agricultural trade option 
merchant, when notifying a customer of its intent to submit a claim or 
grievance to arbitration under a pre-existing agreement, must advise 
the customer in writing that the customer within forty-five days may 
elect to seek reparations under Section 14 of the Act and part 12 of 
this chapter.
    (b) Report of account information. Registered agricultural trade 
option merchants must provide customers with open positions the 
following information:
    (1) Within two business days of the off-set, cancellation or 
settlement of the option for cash, or of the amendment of the 
expiration of the option, a statement of profit or loss on the 
transaction and on the account;
    (2) In response to a customer's request, current commodity price 
quotes, all other information relevant to the customer's position or 
account, and the amount of any funds owed by, or to, the customer 
within one business day if responding orally and within two business 
days if responding in writing;
    (3) Written, verbal or electronic notice of the expiration date of 
each option which will expire within the subsequent calendar month.
    (c) Recordkeeping. Registered agricultural trade option merchants 
shall keep full, complete and systematic books and records together 
with all pertinent data and memoranda of or relating to such 
transactions, including customer solicitations and covering 
transactions, maintain such books and records as specified in Sec. 1.31 
of this chapter, and make such reports to the Commission as provided 
for in paragraphs (c) and (d) of this section and as the Commission may 
otherwise require by rule, regulation, or order. Such books and records 
shall be open at all times to inspection by any representative of the 
Commission and the United States Department of Justice.
    (d) Reports. Registered agricultural trade option merchants must 
file annual reports with the Commission at its Washington, DC, 
headquarters within ninety days after the close of the agricultural 
trade option merchant's fiscal year, in the form and manner specified 
by the Commission, which shall contain the following information:
    (1) By commodity and put, call or combined option:
    (i) Total number of new contracts entered into during the reporting 
period;
    (ii) Total quantity of commodity underlying new contracts entered 
into during the reporting period;
    (iii) Total number of contracts outstanding at the end of the 
reporting period;
    (iv) Total quantity of underlying commodity outstanding under 
option contracts at the end of the reporting period;
    (v) Total number of options exercised during the reporting period; 
and
    (vi) Total quantity of commodity underlying the options exercised 
during the reporting period.
    (2) Total number of customers by commodity with open option 
contracts at the end of the reporting period.
    (e) Special calls. Upon special call by the Commission for 
information relating to agricultural trade options offered or sold on 
the dates specified in the call, each agricultural trade option 
merchant shall furnish to the Commission within the time specified the 
following information as specified in the call:
    (1) All positions and transactions in agricultural trade options, 
including information on the identity of agricultural trade option 
customers and on the value of premiums, fees, commissions, or charges 
other than option premiums, collected on such transactions.
    (2) All related positions and transactions for future delivery or 
options on contracts for future delivery or on physicals on all 
contract markets.
    (3) All related positions and transactions in cash commodities, 
their products, and by-products.
    (f) Internal controls. (1) Each agricultural trade option merchant 
registered with the Commission shall prepare, maintain and preserve 
information relating to its written policies, procedures, or systems 
concerning the agricultural trade option merchant's internal controls 
with respect to market risk, credit risk, and other risks created by 
the agricultural trade option merchant's activities, including systems 
and policies for supervising, monitoring, reporting and reviewing 
trading activities in agricultural trade options; policies for hedging 
or managing risk created by trading activities in agricultural trade 
options, including a description of the types of reviews conducted to 
monitor positions; and policies relating to restrictions or limitations 
on trading activities.
    (2) The financial statements of the agricultural trade option 
merchant must on an annual basis be audited by a certified public 
accountant in accordance with generally accepted auditing standards.
    (3) The agricultural trade option merchant must file with the 
Commission a copy of its certified financial statements within 90 days 
after the close of the agricultural trade option merchant's fiscal 
year.
    (4) The agricultural trade option merchant must perform a 
reconciliation of its books at least monthly.
    (5) The agricultural trade option merchant:
    (i) Most report immediately if its net worth falls below the level 
prescribed in Sec. 3.13(d)(1)(i) of this chapter, and must report 
within three days discovery of a material inadequacy in its financial 
statements by an independent public accountant or any state or federal 
agency performing an audit of its financial statements, to the 
Commission by facsimile, telegraphic or other similar electronic 
notice; and
    (ii) Within five business days after giving such notice, the 
agricultural trade option merchant must file a written report with the 
Commission stating what steps have been taken or are being taken to 
correct the material inadequacy.

[[Page 47461]]

    (6) If the agricultural trade option merchant's net worth falls 
below the level prescribed in Sec. 3.13(d)(1)(i) of this chapter, it 
must immediately cease offering or entering into new option 
transactions and must notify customers having premiums which the 
agricultural trade option merchant is holding under paragraph (a)(4) of 
this section that such customers can obtain an immediate refund of that 
premium amount, thereby closing the option position.
    (g) Exemption. (1) The provisions of Secs. 3.13, 32.2, 32.11 and 
this section shall not apply to a commodity option offered by a person 
which has a reasonable basis to believe that:
    (i) 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 byproducts 
thereof;
    (ii) 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; and
    (iii) Each party to the option contract has a net worth of not less 
than $10 million or the party's obligations on the option are 
guaranteed by a person which has a net worth of $10 million and has a 
majority ownership interest in, is owned by, or is under common 
ownership with, the party to the option.
    (2) Provided, however, that Sec. 32.9 continues to apply to such 
option transactions.

    Issued this 25th day of August, 1999, in Washington, DC, by the 
Commodity Futures Trading Commission.
Catherine D. Dixon,
Assistant Secretary of the Commission.
[FR Doc. 99-22555 Filed 8-30-99; 8:45 am]
BILLING CODE6351-01-M