[Federal Register Volume 76, Number 240 (Wednesday, December 14, 2011)]
[Rules and Regulations]
[Pages 77670-77672]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-31355]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

 RIN 3038-AD64


Retail Commodity Transactions Under Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Interpretation; Request for comments.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is issuing this interpretation of the term ``actual 
delivery'' as set forth in section 2(c)(2)(D)(ii)(III)(aa) of the 
Commodity Exchange Act (``CEA'') pursuant to section 742(a) of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act. The 
Commission requests comment on whether this interpretation accurately 
construes the statutory language. In the event that comments 
demonstrate a need to modify this interpretation, the Commission will 
take appropriate action.

DATES: Effective December 14, 2011. Comments must be received by 
February 13, 2012.

ADDRESSES: Comments, identified by RIN number, may be sent by any of 
the following methods:
     Agency Web site, via its Comments Online process: http://comments.cftc.gov. Follow the instructions for submitting comments 
through the Web site.
     Mail: David A. Stawick, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

FOR FURTHER INFORMATION CONTACT: Rosemary Hollinger, Regional Counsel, 
Division of Enforcement, (312) 596-0538, [email protected], or Martin 
B. White, Assistant General Counsel, Office of the General Counsel, 
(202) 418-5129, [email protected], Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581.
    All comments must be submitted in English, or, if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act (``FOIA''),\1\ a petition for confidential treatment of 
the exempt information may be submitted according to the established 
procedures in Sec.  145.9 of the CFTC's regulations.\2\ The Commission 
reserves the right, but shall have no obligation, to review, prescreen, 
filter, redact, refuse, or remove any or all of your submission from 
http://www.cftc.gov that it may deem to be inappropriate for 
publication, such as obscene language. All submissions that have been 
redacted or removed that contain comments on the merits of the 
rulemaking will be retained in the public comment file and will be 
considered as required under the Administrative Procedure Act and other 
applicable laws, and may be accessible under FOIA.
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    \1\ 5 U.S.C. 552.
    \2\ 17 CFR 145.9.

SUPPLEMENTARY INFORMATION:

I. Background

    On July 21, 2010, President Obama signed the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\ Title VII 
of the Dodd-Frank Act \4\ amended the Commodity Exchange Act (``CEA'') 
\5\ to establish a comprehensive new regulatory framework for swaps and 
security-based swaps. The legislation was enacted to reduce risk, 
increase transparency, and promote market integrity within the 
financial system by, among other things: (1) Providing for the 
registration and comprehensive regulation of swap dealers and major

[[Page 77671]]

swap participants; (2) imposing clearing and trade execution 
requirements on standardized derivative products; (3) creating robust 
recordkeeping and real-time reporting regimes; and (4) enhancing the 
Commission's rulemaking and enforcement authorities with respect to, 
among others, all registered entities and intermediaries subject to the 
Commission's oversight.
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    \3\ See Dodd-Frank Wall Street Reform and Consumer Protection 
Act of 2010, Public Law 111-203, 124 Stat. 1376 (2010). The text of 
the Dodd-Frank Act may be accessed at http://www.cftc.gov/LawRegulation/OTCDERIVATIVES/index.htm.
    \4\ Pursuant to section 701 of the Dodd-Frank Act, Title VII may 
be cited as the ``Wall Street Transparency and Accountability Act of 
2010.''
    \5\ 7 U.S.C. 1 et seq.
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    In addition, section 742(a) of the Dodd-Frank Act amends section 
2(c)(2) of the CEA to add a new subparagraph, section 2(c)(2)(D) of the 
CEA,\6\ entitled ``Retail Commodity Transactions.'' New CEA section 
2(c)(2)(D) provides the Commission with a new source of jurisdiction 
over certain retail commodity transactions.\7\ Congress enacted this 
provision following court decisions, including CFTC v. Zelener,\8\ that 
narrowly interpreted the term ``contract of sale of a commodity for 
future delivery''--the statutory term for a futures contract--based on 
language in customer agreements. Zelener involved retail foreign 
currency transactions that were characterized as spot sales in contract 
documents, but in which, in practice, customer positions were held open 
indefinitely and customers never took delivery of foreign currency.\9\
    Zelener held that the transactions were not subject to CFTC 
jurisdiction because they did not involve futures contracts but were 
``in form, spot sales for delivery within 48 hours.'' \10\ In so 
ruling, the court focused solely on the language of the customer 
agreements.
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    \6\ 7 U.S.C. 2(c)(2)(D).
    \7\ The jurisdictional grant provided to the Commission by new 
CEA section 2(c)(2)(D) is in addition to, and independent from, the 
jurisdiction over contracts of sale of a commodity for future 
delivery and transactions subject to regulation pursuant to CEA 
section 19 that the CEA has historically granted to the Commission. 
The jurisdictional grant provided by new CEA section 2(c)(2)(D) is 
also in addition to, and independent from, the jurisdiction over 
swaps granted to the Commission by the Dodd-Frank Act.
    \8\ 373 F.3d 861 (7th Cir. 2004); see also CFTC v. Erskine, 512 
F.3d 309 (6th Cir. 2008).
    \9\ 373 F.3d at 863-64.
    \10\ Id. at 868-69.
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    Following Zelener, Congress provided the Commission with additional 
authority over retail foreign currency transactions in the CFTC 
Reauthorization Act of 2008.\11\ Similarly, in section 742(a) of the 
Dodd-Frank Act, Congress provided the Commission with additional 
authority over non-foreign currency retail commodity transactions by 
making specified forms of these transactions subject to certain 
provisions of the CEA regardless of whether they involve a ``contract 
of sale of a commodity for future delivery.'' Senator Lincoln explained 
the rationale for this legislation during floor debate on the Dodd-
Frank Act:
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    \11\ Food, Conservation and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651 (2008).

[the] contracts [in Zelener] function just like futures contracts, 
but the court of appeals, * * * based on the wording of the contract 
documents, held them to be spot contracts outside of CFTC 
jurisdiction. The CFTC Reauthorization Act of 2008, which was 
enacted as part of that year's Farm Bill, clarified that such 
transactions in foreign currency are subject to CFTC anti-fraud 
authority. It left open the possibility, however, that such Zelener-
type contracts could still escape CFTC jurisdiction if used for 
other commodities such as energy and metals.
    Section 742 corrects this by extending the Farm Bill's ``Zelener 
fraud fix'' to retail off-exchange transactions in all commodities. 
Further, a transaction with a retail customer that meets the 
leverage and other requirements set forth in Section 742 is subject 
not only to the anti-fraud provisions of CEA Section 4b (which is 
the case for foreign currency), but also to the on-exchange trading 
requirement of CEA Section 4(a), ``as if'' the transaction was a 
futures contract.\12\
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    \12\ 156 Cong. Rec. S5,924 (daily ed. July 15, 2010) (statement 
of Sen. Lincoln); see also Hearing to Review Implications of the 
CFTC v. Zelener Case Before the Subcomm. on General Farm Commodities 
and Risk Management of the H. Comm. on Agriculture, 111th Cong. 52-
664 (2009) (``In 2004 the Seventh Circuit Court made a decision in 
the CFTC v. Zelener [case]. It adopted a narrow definition of the 
term `transactions for future delivery.' What it held is that a 3-
day contract offered to retail customers for foreign currency that 
on its face promised delivery was not a futures contract and was, 
therefore, outside the CFTC's jurisdiction. This was even though the 
contracts operated in practice as futures contracts. Following the 
Zelener decision, many [fraudsters] were given a roadmap to evade 
CFTC jurisdiction and to scam customers or consumers.'') (statement 
of Hon. Leonard L. Boswell, United States Representative and 
Chairman, Subcommittee on General Farm Commodities and Risk 
Management); (``What we are talking about here though is expanding 
the--well, correcting would be the argument the Zelener 
interpretation of what a futures contract is. If in substance it is 
a futures contract, it is going to be regulated. It doesn't matter 
how clever your draftsmanship is.'') (statement of Hon. Jim 
Marshall, United States Representative).

    Accordingly, new CEA section 2(c)(2)(D) broadly applies to any 
agreement, contract, or transaction in any commodity that is entered 
into with, or offered to (even if not entered into with), a non-
eligible contract participant or non-eligible commercial entity on a 
leveraged or margined basis, or financed by the offeror, the 
counterparty, or a person acting in concert with the offeror or 
counterparty on a similar basis.\13\ New CEA section 2(c)(2)(D) further 
provides that such an agreement, contract, or transaction shall be 
subject to CEA sections 4(a),\14\ 4(b),\15\ and 4b \16\ ``as if the 
agreement, contract, or transaction was a contract of sale of a 
commodity for future delivery.'' \17\
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    \13\ 7 U.S.C. 2(c)(2)(D)(i).
    \14\ 7 U.S.C. 6(a).
    \15\ 7 U.S.C. 6(b).
    \16\ 7 U.S.C. 6b.
    \17\ 7 U.S.C. 2(c)(2)(D)(iii).
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    New CEA section 2(c)(2)(D) excepts certain transactions from its 
application. In particular, new CEA section 2(c)(2)(D)(ii)(III)(aa) 
\18\ excepts a contract of sale that ``results in actual delivery 
within 28 days or such other longer period as the Commission may 
determine by rule or regulation based upon the typical commercial 
practice in cash or spot markets for the commodity involved.'' \19\
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    \18\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(aa).
    \19\ The Commission has not adopted any regulations permitting a 
longer actual delivery period for any commodity pursuant to new CEA 
section 2(c)(2)(D)(ii)(III)(aa). Accordingly, the 28-day actual 
delivery period set forth in this provision remains applicable to 
all commodities.
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    The Commission is issuing this interpretation to inform the public 
of the Commission's views as to the meaning of the term ``actual 
delivery'' as used in new CEA section 2(c)(2)(D)(ii)(III)(aa) and to 
provide the public with guidance on how the Commission intends to 
assess whether any given transaction results in actual delivery within 
the meaning of the statute.\20\ The Commission requests comment on 
whether its interpretation of ``actual delivery'' accurately construes 
the statutory language.
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    \20\ In 1985, the Commission's Office of General Counsel issued 
a staff interpretation determining whether certain hypothetical 
precious metals transactions would be subject to regulation under 
the CEA. Interpretive Letter 85-2, Bank Activities Involving the 
Sale of Precious Metals (CFTC Office of General Counsel Aug. 6, 
1985), Comm. Fut. L. Rep. (CCH) ] 22,673 (``Letter 85-2''). Letter 
85-2 opined on whether the hypothetical transactions would 
constitute leverage contracts, as defined by 17 CFR 31.4(w), or 
contracts of sale of a commodity for future delivery, as that term 
is used in CEA section 2(a)(1)(A). Letter 85-2 is not relevant to a 
determination of whether ``actual delivery'' has occurred within the 
meaning of new CEA section 2(c)(2)(D)(ii)(III)(aa) for several 
reasons, including, but not limited to, the following: (1) Letter 
85-2 predates new CEA section 2(c)(2)(D) by approximately 26 years 
and therefore does not purport to construe new CEA section 
2(c)(2)(D); (2) to the extent Letter 85-2 assumes the occurrence of 
delivery of a commodity, it does not purport to determine whether 
``actual delivery'' has occurred under new CEA section 
2(c)(2)(D)(ii)(III)(aa); and (3) new CEA section 2(c)(2)(D)(iii) 
explicitly subjects certain retail commodity transactions to CEA 
sections 4(a), 4(b), and 4b ``as if'' they were contracts of sale of 
a commodity for future delivery, regardless of whether they are, in 
fact, contracts of sale of a commodity for future delivery under CEA 
section 2(a)(1)(A).
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    This interpretation does not address the meaning or scope of new 
CEA section 2(c)(2)(D)(ii)(III)(bb) \21\ or any exception to new CEA 
section 2(c)(2)(D) other than new CEA section 2(c)(2)(D)(ii)(III)(aa). 
Similarly, this

[[Page 77672]]

interpretation does not address the meaning or scope of contracts of 
sale of a commodity for future delivery, the forward contract exclusion 
from the term ``future delivery'' set forth in CEA section 1a(27),\22\ 
or the forward contract exclusion from the term ``swap'' set forth in 
CEA section 1a(47)(B)(ii).\23\ Nor does this interpretation alter any 
statutory interpretation or statement of Commission policy relating to 
the forward contract exclusion.\24\
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    \21\ 7 U.S.C. 2(c)(2)(D)(ii)(III)(bb).
    \22\ 7 U.S.C. 1a(27).
    \23\ 7 U.S.C. 1a(47)(B)(ii).
    \24\ See, e.g., Statutory Interpretation Concerning Forward 
Transactions, 55 FR 39188 (Sept. 25, 1990) (``Brent 
Interpretation'').
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II. Commission Interpretation of ``Actual Delivery''

    In the view of the Commission, the determination of whether 
``actual delivery'' has occurred within the meaning of new CEA section 
2(c)(2)(D)(ii)(III)(aa) requires consideration of evidence regarding 
delivery beyond the four corners of contract documents. This 
interpretation of the statutory language is based on Congress's use of 
the word ``actual'' to modify ``delivery'' and on the legislative 
history of new CEA section 2(c)(2)(D)(ii)(III)(aa) described above. 
Consistent with this interpretation of the statutory language, in 
determining whether actual delivery has occurred within 28 days, the 
Commission will employ a functional approach and examine how the 
agreement, contract, or transaction is marketed, managed, and 
performed, instead of relying solely on language used by the parties in 
the agreement, contract, or transaction. This approach best 
accomplishes Congress's intent when it enacted section 742(a) of the 
Dodd-Frank Act and gives full meaning to Congress's term ``actual 
delivery.''
    Relevant factors in this determination include the following: 
ownership, possession, title, and physical location of the commodity 
purchased or sold, both before and after execution of the agreement, 
contract, or transaction; the nature of the relationship between the 
buyer, seller, and possessor of the commodity purchased or sold; and 
the manner in which the purchase or sale is recorded and completed. The 
Commission provides the following examples to illustrate how it will 
determine whether actual delivery has occurred within the meaning of 
new CEA section 2(c)(2)(D)(ii)(III)(aa).

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

    Issued in Washington, DC, on December 1, 2011 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2011-31355 Filed 12-13-11; 8:45 am]
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