[Federal Register Volume 64, Number 233 (Monday, December 6, 1999)]
[Rules and Regulations]
[Pages 68011-68019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31453]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 3 and 32

RIN 3038-AB43


Trade Options on the Enumerated Agricultural Commodities

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
in April 1998, removed a long-standing prohibition on the offer and 
sale of off-exchange trade options on certain agricultural commodities 
subject to a number of regulatory requirements. On August 31, 1999, the 
Commission proposed to amend a number of those requirements. 64 FR 
47452. The Commission is adopting as final those proposed amendments. 
In particular, the Commission is permitting cash settlement and offset 
or cancellation of agricultural trade options. It is also eliminating 
the transaction-specific disclosure statement, revising the summary 
disclosure statement provided to customers when opening an account and 
streamlining the registration requirements for Agricultural Trade 
Option Merchants (ATOMs) and their sales agents and certain reporting 
and recordkeeping requirements. The Commission believes that these 
amendments will increase the commercial utility of agricultural trade 
options while maintaining basic customer protections.

EFFECTIVE DATE: February 4, 2000.

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 [P[email protected]].

SUPPLEMENTARY INFORMATION:

I. Background

    In April 1998, the Commission promulgated interim final rules to 
permit the trading of agricultural trade options subject to various 
regulatory requirements.\1\ 63 FR 18821 (April 16, 1998). These 
requirements provided a number of customer protections, including 
limitations on the types of instruments or strategies permitted to be 
traded, registration of ATOMs, disclosure of risks to option buyers, 
financial safeguards, and recordkeeping. No one has applied for 
registration as an ATOM since the interim rules became effective in 
June 1998. Some observers have suggested that certain of the interim 
final rules' provisions discourage participation, and agricultural 
trade options would be offered more readily if the rules were 
modified.\2\
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    \1\ 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). 7 U.S.C. 
1a(3). 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).
    \2\ The Commission receives the views of a cross-section of the 
agricultural sector through its Agricultural Advisory Committee 
(AAC). The AAC, at its meeting on April 21, 1999, engaged in a 
detailed discussion of various policy issues raised by possible rule 
alternatives. 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. 
The nine producer organizations were: (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.
    Additional letters were submitted by the Farm Credit Council 
(dated April 19, 1999), the Illinois Farm Bureau (dated April 21, 
1999), the National Grain and Feed Association (NGFA) (dated June 
15, 1999), the Chicago Board of Trade (CBT) (dated June 16, 1999), 
the National Grain Sorghum Producers (dated July 9, 1999), and the 
American Farm Bureau Federation, the National Association of Wheat 
Growers, the American Soybean Association and the National Farmers 
Union (joint letter dated August 9, 1999).
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A. Proposed Revisions to the Agricultural Trade Option Rules

    Based in part on those views, the Commission published a notice of 
proposed rulemaking (proposed rulemaking) reconsidering a number of the 
requirements of the agricultural trade option rules ``with a view 
toward maintaining their basic customer protection while increasing the

[[Page 68012]]

commercial utility of the instruments or trading strategies permitted 
and streamlining regulatory or paperwork burdens.'' 64 FR 47452 (August 
31, 1999). In particular, the Commission proposed to streamline the 
registration requirements for 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 proposed 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 also proposed to eliminate the transaction-
specific disclosure statement and to revise the summary disclosure 
statement provided to customers when opening an account. The Commission 
also proposed to streamline certain reporting and recordkeeping 
requirements. It also considered, but did not propose, permitting 
producers to write call options or changing the $10 million exemptive 
level.

B. Comments

    The Commission received a total of 22 comment letters, including 
those recommending that the Commission propose various amendments to 
the interim final rules. See note 2 supra. Overall, the comment letters 
expressed a wide range of opinions. Five commenters, including one 
academic, two introducing brokers (IBs), one commodity trading advisor 
(CTA)/IB and the National Introducing Brokers Association (NIBA) 
generally opposed the proposed changes. They expressed the view that 
the proposed amendments would weaken existing customer protections, 
increase the opportunity for fraud and abuse and facilitate poor 
business practices on the part of those offering or soliciting 
agricultural trade options.
    Eight commenters, including four agribusinesses, three trade 
associations and one risk management firm, generally supported the 
proposed changes. They particularly supported the proposal to permit 
cash settlement and offset or cancellation of the option contracts, but 
argued that the Commission should go farther in easing the rule's 
requirements. They especially objected to the $10 million dollar 
exemption level and to the requirement that option vendors and their 
sales agents be registered with the Commission. In contrast, the nine 
producer organizations strongly supported retaining the registration 
requirement, including the associated right of a registrant's customers 
to bring grievances arising from a violation of the Act or Commission 
rules before the Commission's reparations forum, and opposed lowering 
the $10 million exemption level.\3\
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    \3\ Additional comments were submitted by the Chicago Board of 
Trade (CBT), the Chicago Mercantile Exchange (CME) and a futures 
commission merchant (FCM). The CBT concurred with many of the 
proposed changes, noting that it was ``pleased that the Commission 
has incorporated several of [the CBT's] recommendations into [the 
Commission's] proposed rulemaking.'' See the CBT's comment letter at 
p. 1. The CME did not address the specific issues raised in the 
proposed rulemaking.
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II. The Final Rules

A. Registration

    As the Commission noted in its proposed rulemaking, ``[t]he 
requirement that all market profession[als] be registered, and the 
authority to approve or revoke registrations, is an important means of 
policing conduct in a market.'' 64 FR 47453. As the Commission 
explained in the proposed rulemaking, with registration customers have 
available to them the Commission's reparations forum for dispute 
resolution.\4\ Although there is ``substantial 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,'' potential agricultural 
trade option vendors are opposed to the registration requirement. Id. 
Accordingly, the Commission specifically invited comments in the 
proposed rulemaking on the issue.
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    \4\ Specifically:
    [S]ection 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 [b]efore the Commission. Accordingly, 
complaints that do not relate to violations of the Act or Commission 
rules are not subject to Commission reparations proceedings.
    Id.
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    The NGFA's comment letter opposed a registration requirement and 
urged the Commission to ``seriously consider notification as an 
alternative''.\5\ NGFA's continued opposition to registration flows 
from its opposition to the availability of Commission reparations 
proceedings to customers to resolve disputes with ATOMs involving trade 
options. NGFA voiced particular concern that the availability of 
reparations to resolve disputes involving trade options might expose 
ATOMs to reparations cases involving cash contracts.\6\
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    \5\ See the letter of September 30, 1999 from NGFA to the 
Commission.
    \6\ Other commenters, including three agribusinesses, concurred 
in NGFA's position. They noted that the reparations requirement 
might deter them, as well as others, from offering these 
instruments. One commenter, Consolidated Grain and Barge, Co., 
expressed particular support for the NGFA arbitration system. The 
CBT also supported rules permitting required dispute resolution 
under industry arbitration procedures such as the NGFA's trade 
rules.
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    In contrast, the nine producer organizations expressed strong 
support for maintaining the registration requirement. Other commenters, 
including NIBA, an academic and other Commission registrants agreed. In 
general, these commenters were of the view that registration of those 
offering or soliciting agricultural trade options is an essential 
customer protection which should be mandatory.
    Based upon thorough and careful consideration of the comments, the 
Commission has determined to retain the current registration 
requirement, which includes the statutory right to seek redress of 
violations of the Act or Commission rules through Commission 
reparations proceedings. This is particularly appropriate because 
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.'' 64 FR 47453.\7\
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    \7\ The Commission is also incorporating, as proposed, 
streamlined procedures clarifying the use 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.
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    In retaining the registration requirement for ATOMs and their APs, 
the Commission notes that reparation proceedings are available only 
where a violation of the Act or Commission rules is alleged. Under the 
Commission's rules, the Director of the Office of Proceedings forwards 
a complaint and answer if the facts alleged so warrant. If no violation 
of the Act or Commission rules is alleged, the Director of the Office 
of Proceedings may terminate consideration of the filings. See, 17 CFR 
12.26, 12.27. A dispute arising solely out of a cash market 
transaction, therefore, would be dismissed and not forwarded for 
adjudicatory action.
1. Simplification of the Registration Process
    The Commission proposed a number of modifications based upon the 
acknowledged ``broad agreement that the registration procedures for 
ATOMs and their sales agents be streamlined

[[Page 68013]]

and simple.'' Id. at 47454. Specifically, the Commission proposed 
removal of the requirement that ATOMs separately certify the truth of 
their principals' and APs' applications. The Commission also proposed 
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. In addition, the Commission proposed deletion 
of the mandatory six-hour training course for ATOMs' sales agents.
    NIBA, the academic commenter and the registrants opposed the 
proposed amendments, particularly deletion of the mandatory six-hour 
training required of APs. NGFA, the agribusinesses, a trade 
association, and the CBT supported the proposed changes, although 
several opined that the proposed changes did not go far enough. The 
three agribusinesses particularly commended the Commission for 
proposing to delete the mandatory AP training requirement.
    The Commission is adopting the proposed amendments to the 
registration procedures as final rules. In doing so, it has modified 
the definition of an AP, as provided in Commission Rule 3.13(a)(2)(ii), 
to include those who ``supervise directly,'' an ATOMs'' associated 
persons. The Commission also is modifying Rule 3.13(b) to state that 
those who ``supervise directly'' an ATOMs' associated persons, must 
register as an AP. These modifications clarify that only immediate 
supervisors of associated persons must register as APs (in addition to 
principals of the firm who control or direct the ATOM's activities) and 
must certify that they are not disqualified from registration under the 
Act. These modifications clarify that second or third tier supervisors 
are not covered by the registration and certification requirements.
    In addition to the proposed amendments, the Commission requested 
comment on the relative burden and benefits of the current requirement 
that ATOMs notify the NFA when an associated person leaves its employ 
or when a new associated person begins. Generally, commenters did not 
respond to the request for comment. However, as some have observed, 
ATOMs, particularly those with a decentralized sales force, potentially 
will benefit from the requirement, which offers customers a means to 
determine whether an individual is duly authorized to offer and sell 
trade options on an ATOM's behalf. Accordingly, the Commission is 
retaining the requirement.\8\
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    \8\ Under prior Commission Rule 3.13(c)(2), when an AP ceased to 
be associated with an ATOM, the ATOM was required to notify NFA of 
that disassociation within 20 days of the disassociation's 
occurrence. The Commission has revised Rule 3.13(c)(2) to extend 
this notification time period to 45 days to enable smaller 
businesses to perform this notification as part of their routine 
month-end accounting.
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2. Commission Processing of Applications
    Seven commenters addressed specifically the Commission's request 
for comments on the possible benefits to ATOMs, their APs or potential 
customers from the Commission's direct processing of registration 
applications, and the relative costs of such a proposal. Four 
commenters opined that it would be more efficient for NFA to perform 
this administrative task on the Commission's behalf as the interim 
final rules currently provide.\9\ Two commenters disagreed, raising 
concerns regarding the degree of regulatory oversight NFA will have in 
performing this function.
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    \9\ Under the interim final rules, the Commission delegated to 
NFA the authority to directly process applications for registration 
as an ATOM or an AP of an ATOM.
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    The Commission remains convinced that NFA should perform these 
functions on the Commission's behalf. In reaching this conclusion, the 
Commission found that the possible benefits to ATOMs and their APs or 
potential customers from the Commission's direct processing of 
registration applications did not outweigh the relative costs of such a 
proposal.\10\ Accordingly, the Commission finds it appropriate that 
NFA, which has the capacity to process registration applications with 
only minor changes to its existing systems, will perform these 
functions.\11\
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    \10\ As the Commission explained in the proposed rulemaking, 
during the 1980s, it:
    [C]ompletely transferred [its registration administrative 
functions] to NFA * * * and no longer has systems in place to 
process [registration applications such as those filed by ATOMs or 
their APs]. 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.
    64 FR 47454.
    \11\ NGFA expressed that the Commission should clarify what 
degree of ``regulatory authority'' NFA will have in processing 
applications. In this regard, as explained by the Commission in its 
proposed rulemaking, these final rules, like the prior 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.'' Id.
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    Finally, one commenter suggested that the Commission permit 
potential registrants to begin filing for registration with the NFA as 
ATOMs and their APs in reliance upon the amended registration 
conditions in advance of the effective date of the rules. The 
Commission will take no adverse action in connection with an ATOM and 
its APs processing or submitting registration materials with the NFA in 
reliance on these amended procedures in advance of the rule's effective 
date.\12\ Because currently there are no registered ATOMs, to the 
extent that the amended rules increase the likelihood of registration 
and competition to be the first registered, an initial surge may cause 
administrative delay. This no-action position is in the public interest 
because it will enable ATOMs and their APs an initial period during 
which to process and submit their registrations with NFA so that all 
interested ATOMS may begin offering and selling trade options under the 
amended rules as soon as the rules become effective, in time for the 
coming crop year. This will provide producers with greater availability 
of instruments and choice in vendors in time to meet their hedging 
needs for the coming crop year.
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    \12\ Although ATOMs and their APs may have their registration 
applications processed in reliance upon the amended rules, unless 
they are registered in compliance with the current rules, they may 
not offer or sell these instruments until the rule amendments are 
effective.
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B. Cash Settlement

    In proposing to permit cash settlement and offset or cancellation 
of agricultural trade options, the Commission noted its widespread 
support ``among all sectors of agriculture.'' Id at 47455. In addition, 
the Commission proposed 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). In making this proposal, the Commission explained that:

    [C]ustomers could have expected to have their accounts settled 
upon physical delivery, and this requirement will ensure that 
customers who cash settle their contracts are provided with similar 
information. 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.

Id.\13\
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    \13\ The Commission also noted that ``[i]n 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.'' Id.
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    The majority of commenters strongly approved of the proposed 
change,

[[Page 68014]]

noting that it is ``critical'' to increasing the ``effectiveness and 
flexibility of these products for both buyers and sellers.'' \14\ A 
minority of commenters opposed the proposal, however, voicing concern 
that if cash settlement is permitted, agricultural trade options 
``could easily develop into an off-exchange traded speculative 
marketplace.''
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    \14\ See the CBT's letter of September 30, 1999 to the 
Commission.
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    The Commission is adopting the rule as proposed, including the 
requirement that ATOMs provide customers with an account statement 
following the termination, cancellation, cash settlement or amendment 
of an option's expiration date (rolling the contract). The Commission 
is also clarifying that commercial enterprises eligible to be ATOMs 
include those selling inputs used in producing the commodity as well as 
banks that routinely finance businesses involved in the production, 
processing or handling of the commodity. 64 FR 47455.\15\
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    \15\ An FCM submitted a comment letter to the Commission 
requesting clarification on whether FCMs can register to become 
ATOMs. The Commission believes that an FCM may satisfy the 
requirements of Rule 32.13(a) and be allowed to become an ATOM. 
However, there are issues unique to FCMs, including possible 
procedures to address potential conflict of interest by a 
fiduciary's becoming the principal of an off-exchange transaction 
and the effect of that position on the FCM's required net capital. 
The Commission will consider these issues in a separate Federal 
Register release.
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C. Risk Disclosure, Customer Account Information and Reports to the 
Commission

1. Risk Disclosure
    The interim final rules required 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.\16\ However, as noted by the Commission in the notice of 
proposed rulemaking, representatives of both potential trade option 
vendors and customers agreed that many of the transaction-specific 
disclosures could be made in the summary disclosure statement and 
others readily ascertainable from the face of the option contract 
itself, thus permitting the elimination of the transaction-specific 
disclosure requirement. Id. Accordingly, the Commission proposed to 
streamline risk disclosure by revising the summary disclosure to 
include some of the material that formerly was included in the 
transaction-specific disclosure. Id.
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    \16\ The transaction-specific disclosure included information 
relating to the specific terms of a particular transaction. The ATOM 
was required to disclose the customer's worst possible financial 
outcome when the option premium was not collected up front or when 
an option contract was amended.
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    Although two commenters supported retention of the current risk 
disclosure rules, a number of commenters described the proposed 
amendments as ``positive.'' \17\ The Commission is adopting the rules 
as proposed.
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    \17\ Cargill, in its comment characterized them as 
``reasonable'' and ``necessary.'' See the letter of September 30, 
1999 from Cargill Grain Division to the Commission.
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2. Customer Account Information
    In addition to proposing revisions to streamline the risk 
disclosure requirements, the Commission proposed to amend the 
requirements relating to reporting of account information to 
customers.\18\ As explained in the proposed rulemaking:

    \18\ Specifically, under prior Rule 32.13(b), ATOMs were 
required to provide customers with written confirmation of contracts 
within 24 hours of executions and within 48 hours of a customer 
request, a written response regarding the customer's account or 
position. In addition, ATOMs were required to notify customers in 
writing of an option's expiration within the coming calendar month.

    A number of sources, including several state-level 
representatives of producers and commodity first handers, suggested 
that the requirements that ATOMs provide customers with account-
related information potentially created too great a paperwork burden 
for smaller firms. * * * Similarly, some have observed that oral 
contracting is still the prevailing means of transacting business in 
certain agricultural cash markets, and they suggest 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 
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of such oral contracts when they have been confirmed in writing.

64 FR 47455-47456.
    One commenter opined that ``verbal confirmation is not an 
acceptable business practice.'' The Commission agrees that best 
business practice is for all such communications to be in writing, 
including the option contract itself at the time the contract is made. 
However, there was consensus among representatives of potential vendors 
and purchasers that the Commission's rules should be amended to 
correspond more closely to current practice permitted under state law. 
Accordingly, the Commission is adopting the rule amendments as 
proposed, permitting ATOMs to enter into a contract orally, with 
subsequent written confirmation.\19\ The written confirmation, which 
must be signed by the ATOM, must include all material terms of the 
option contract. The rules further permit use of oral communications 
and notice to customers with respect to account information.
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    \19\ The Commission notes that a customer retains the right to 
have a written agricultural trade option contract and that, unless 
the customer chooses to contract orally, the ATOM must provide the 
agricultural trade option contract to the customer in writing.
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3. Reports to the Commission
    The interim rules required ATOMs to file reports on volume and open 
interest four times a year with the NFA. In response to this 
requirement, the Commission observed that there was ``widespread 
support among agricultural groups for reducing ATOMs required 
reports.'' 64 FR 47456. In light of this, the Commission proposed 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.
    Commenters addressing this specific proposed change offered a 
variety of views. One commenter, an agribusiness, disfavored having 
this reporting requirement, indicating that while the Commission was 
proceeding in the right direction by reducing the number of required 
reports, ultimately, it should delete the requirement all together. 
However, other commenters, including two agribusinesses and NGFA, 
voiced their support for this proposed amendment. In particular, one 
agribusiness stated that ``the switch to annual reporting will greatly 
reduce the paperwork required to participate in the program.''
    Taking these comments into consideration, the Commission believes 
it appropriate to reduce the periodic reporting requirement that ATOMs 
file reports on volume and open interest four times a year with the 
NFA, to one annual report, filed by the ATOM with the Commission within 
90 days of the end of its fiscal year, as proposed. Also as proposed, 
the Commission is retaining authority to obtain information as needed 
for regulatory purposes through inspections of the books and records of 
a particular firm and to 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.
    The Commission is also revising, as proposed, 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 offer 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

[[Page 68015]]

32.6(a)). The Commission is applying that 90% requirement to 
agricultural trade options, as well. This will provide ATOMs with 
greater flexibility in structuring their businesses.

D. Required Contract Terms and Limitations on Certain Strategies

    Commission final interim Rule 32.13(a)(6)(i)-(vii) required that 
agricultural trade option contracts specify a number of contract 
terms.\20\ The Commission proposed to delete these design requirements 
on the grounds that the terms would be expected to be found in any 
fully-specified physical delivery option contract. Instead, the 
Commission proposed to include a statement in the Disclosure Document 
that option customers should be sure that the contract includes, and 
that the customer understands the operation of, all of the above 
contract provisions. The Commission believes that the proposal provides 
adequate customer protection while permitting ATOMS greater flexibility 
in specifying option contracts and is therefore adopting the change as 
final.
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    \20\ These terms included 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.
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    The Commission did not propose to change the existing requirement 
that a producer may write a call only to the extent that it is paired 
with a purchased or long put option in a window or fence strategy.\21\ 
The Commission explained that, although 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, many 
producer representatives opposed changing the current requirement. As 
the Commission noted, this strategy:
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    \21\ See 64 FR 47456.

    [I]s 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 
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opposed changing the interim rules in this respect.

Id.

    Two commenters in addition to the nine producer organizations 
supported continuation of the prohibition against producers writing 
covered calls. Others disagreed, suggesting that the prohibition 
against producers writing covered call options should be lifted to 
allow the greatest flexibility possible in formulating risk management 
strategies. As explained by one trade association, ``[w]e believe the 
prohibition is an unnecessary restriction and could reduce the profit 
potential for an agricultural business and limit the potential for 
managing commodity price risk.''\22\
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    \22\ See the letter of September 30, 1999 from the National 
Grain Trade Council to the CFTC.
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    After careful consideration of the comments on this proposal, the 
Commission remains convinced that the current prohibition permitting 
call writing by producers only to the extent that the written call is 
paired with a purchased or long put option in a window or fence 
strategy should not be revised at this time. As the Commission stated 
in the proposed rulemaking, however, ``[i]n 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.'' 64 FR 47456.

E. Exemption Level for Sophisticated Entities

    The interim rules exempted transactions in which each party to the 
option contract had a net worth of not less than $10 million from 
compliance with all of the specific conditions for trading agricultural 
trade options. 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 implementing the exemption 
for sophisticated entities, the Commission observed that there was no 
consensus among commenters regarding what the exemption level should 
be, or whether there should be an exemption at all.
    Several commenters remarked on the current exemption level. 
Overall, there continues to be a lack of consensus regarding lowering 
the exemption level. Although some commenters advocated lowering the 
dollar amount of the exemption level, others, including the producer 
organizations opposed any exemption from the amended requirements or 
advocated maintaining the exemption at the current level. In light of 
the wide diversity of opinion, the untested nature of the rules, and 
the very broad changes already being made, the Commission continues to 
believe that the current exemption level should not be reduced at this 
time.

III. Other Matters

A. Paperwork Reduction Act (PRA)

    Rules 3.13(e), 32.6, 32.13(a), 32.13(d), 32.13(e), 32.13(f)(1), 
32.13(F)(2)-(5) and 32.13(c) contain information collection 
requirements. As required by the PRA of 1995 (Pub. L. 104-13 (May 13, 
1996)), the Commission submitted a copy of the proposed rules and the 
associated paperwork burden to the Office of Management and Budget 
(OMB) for its review (44 U.S.C. 3504(h)) and requested comments on the 
paperwork burden from the public. The Commission did not receive 
comments addressing this specific associated paperwork burden. The 
Commission did receive and address, however, comments concerning the 
information that would be collected under the proposed rules.
    OMB previously approved the collection of information related to 
these rules as information collection 3038-0048, Off-Exchange 
Agricultural Options. The final rules adopted by the Commission, which 
have been submitted to OMB for approval, have the following paperwork 
burden:
    Number of respondents: 3,605.
    Estimated average hours per response: 5.59.
    Frequency of response: On occasion and annually.
    Number of responses per year: 4,115.
    Annual reporting burden: 23,003.
    This represents a reduction of 9,045 burden hours as a result of 
the rule changes adopted. Persons wishing to comment on the paperwork 
burden contained in the final rules may 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 consider the 
impact of their 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 requiring one of the conditions for 
registration as an agricultural trade option merchant to be 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

[[Page 68016]]

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.

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 amends 
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 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, 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 directly 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 directly 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 forty five 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 and 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 or the United States Department of 
Justice for the purpose of inspecting books and records.
    (2) Applicants for registration as an associated person of an 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)

[[Page 68017]]

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 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:


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 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 on 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 or enters into the 
commodity option transaction solely for purposes related to its 
business as such.
    (3) [Reserved]
    (4) To the extent that the customer makes payment of the purchase 
price to the agricultural trade option merchant prior to option 
expiration or exercise, that amount:
    (i) May only be used by the agricultural 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.
    (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 the customer's put option position in the 
amount to be delivered. Provided, however, that the options 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, or 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 agricultural trade option merchant, the 
agricultural 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

[[Page 68018]]

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 offset 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 offset 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.

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. Agricultural trade option 
merchants must provide to customers with open positions the following 
information:
    (1) Within two business days of the offset, 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. Agricultural trade option merchants shall keep 
full, complete and systematic books and records together with all 
pertinent data and memoranda of or relating to agricultural trade 
option transactions, covering transactions, and all written or 
electronic customer solicitation materials. Agricultural trade option 
merchants shall maintain such books and records as specified in 
Sec. 1.31 of this chapter, and report to the Commission as provided for 
in this paragraph (c) and paragraph (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. 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

[[Page 68019]]

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) Must 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, such report to 
be made 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.
    (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 of this chapter 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 29th day of November, 1999, in Washington, DC, by 
the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 99-31453 Filed 12-3-99; 8:45 am]
BILLING CODE 6351-01-P