Daily Rules, Proposed Rules, and Notices of the Federal Government


17 CFR Parts 1, 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 38, 41, 140, 145, 155, and 166

RIN Number 3038-AD53

Adaptation of Regulations To Incorporate Swaps

AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
SUMMARY: The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act" or "DFA") established a comprehensive new statutory framework for swaps and security-based swaps. The Dodd-Frank Act repeals some sections of the Commodity Exchange Act ("CEA" or "Act"), amends others, and adds a number of new provisions. The DFA also requires the Commodity Futures Trading Commission ("CFTC" or "Commission") to promulgate a number of rules to implement the new framework. The Commission has proposed and finalized numerous rules to satisfy its obligations under the DFA. This rulemaking makes a number of conforming amendments to integrate the CFTC's regulations more fully with the new framework created by the Dodd-Frank Act.
DATES: Effective January 2, 2013.
FOR FURTHER INFORMATION CONTACT: Peter A. Kals, Special Counsel, 202-418-5466,,Division of Clearing and Risk; Elizabeth Miller, Attorney-Advisor, 202-418-5450,,Division of Swap Dealer and Intermediary Oversight; David E. Aron, Counsel, 202-418-6621,,Office of General Counsel; Alexis Hall-Bugg, Attorney-Advisor, 202-418-6711,,Division of Market Oversight; Katherine Driscoll, Senior Trial Attorney, 202-418-5544,,Division of Enforcement, Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street NW., Washington, DC 20581.

Table of Contents I. Background II. Amended Regulations A. Part 1 1. Regulation 1.3: Definitions a. General Changes b. Various Amended and New Definitions (Regulation 1.3) c. Regulation 1.3(t): Open Contract d. Regulation 1.3(ll): Physical e. Regulation 1.3(ss): Foreign Board of Trade f. Regulation 1.3(yy): Commodity Interest g. Regulation 1.3(z): Bona Fide Hedging Transactions and Positions h. Lack of a Definition of “End-User” in Regulation 1.3 2. Regulation 1.4: Use of Electronic Signatures 3. Regulation 1.31: Books and Records; Keeping and Inspection 4. Regulations 1.33: Monthly and Confirmation Statements 5. Regulation 1.35: Records of Cash Commodity, Futures and Option Transactions 6. Regulation 1.37: Customer's or Option Customer's Name, Address, and Occupation Recorded; Record of Guarantor or Controller of Account 7. Regulation 1.39: Simultaneous Buying and Selling Orders of Different Principals; Execution of, for and Between Principals 8. Regulation 1.40: Crop, Market Information Letters, Reports; Copies Required 9. Regulation 1.59: Activities of Self-Regulatory Employees, Governing Board Members, Committee Members and Consultants 10. Regulation 1.63: Service on Self-Regulatory Organization Governing Boards or Committees by Persons With Disciplinary Histories 11. Regulation 1.67: Notification of Final Disciplinary Action Involving Financial Harm to a Customer 12. Regulation 1.68: Customer Election Not To Have Funds, Carried by a Futures Commission Merchant for Trading on a Registered Derivatives Trading Execution Facility, Separately Accounted for and Segregated 13. Regulations 1.44, 1.53, and 1.62—Deletion of Regulations Inapplicable to Designated Contract Markets 14. Technical Changes to Part 1 in Order to Accommodate Recently Finalized Part 22 and Corresponding Changes to Part 22 B. Part 7 C. Part 8 D. Parts 15, 18, 21, and 36 E. Parts 41, 140 and 145 F. Parts 155 and 156 G. Other General Changes to CFTC Regulations 1. Removal of References to DTEFs 2. Other Conforming Changes III. Administrative Compliance A. Paperwork Reduction Act B. Regulatory Flexibility Act C. Consideration of Costs and Benefits I. Background

On July 21, 2010, President Obama signed the Dodd-Frank Act into law.1 Title VII of the Dodd-Frank Act2 (“Title VII”) amended the CEA3 to establish a comprehensive new regulatory framework for swaps and security-based swaps. The legislation was enacted, among other reasons, to reduce risk, increase transparency, and promote market integrity within the financial system by, among other things: (1) Providing for the registration and comprehensive regulation of swap dealers (“SDs”), security-based swap dealers, major swap participants (“MSPs”), and major security-based swap participants; (2) imposing clearing and trade execution requirements on swaps and security-based swaps, subject to certain exceptions; (3) creating rigorous recordkeeping and real-time reporting regimes; and (4) enhancing the rulemaking and enforcement authorities of the Commissions with respect to, among others, all registered entities and intermediaries subject to the Commission's oversight.

1See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010). The text of the Dodd-Frank Act is available at

2Pursuant to section 701 of the Dodd-Frank Act, Title VII may be cited as the “Wall Street Transparency and Accountability Act of 2010.”

37 U.S.C. 1et seq.(2006).

To apply its regulatory regime to the swap activity of intermediaries, the Commission must make a number of changes to its regulations to conform them to the Dodd-Frank Act. On June 7, 2011, the Commission published in theFederal Registera proposal to make such changes (“the Proposal”).4 There was a 60-day period for the public to comment on the Proposal, which ended on August 8, 2011. The Commission received 39 comment letters from a variety of institutions, including designated contract markets (“DCMs”), agricultural trade associations, and agricultural cooperatives.5 The Commission has determined to adopt the proposed rules primarily in the form proposed with certain modifications, discussed below, to address the comments the Commission received. With respect to certain of the proposed changes to regulation 1.356 (regarding recording of oral communications and the scope of written communications) and related amendments to regulation 1.31, the Commission has determined to address those changes in a final rule in a separate release.

4Adaptation of Regulations to Incorporate Swaps, 76 FR 33066 (June 7, 2011) (“Proposing Release”).

5Comment letters are available in the comment file

6All Commission regulations are in Chapter I of Title 17 of the CFR.

The Commission is mindful of, and continues to consider, the comments received on the Proposal's amendments to regulation 1.35 (records of commodity interest and cash commodity transactions). Those comments were submitted by various groups, including DCMs, representatives of the FCM and IB communities, energyend-users, and agricultural trade associations and cooperatives.7 These commenters focused primarily on: the proposed oral communications recordkeeping requirement, in general; the proposed requirement that all members of a DCM or SEF, including unregistered commercial end-users and non-intermediaries, keep records of the oral communications that lead to the execution of a cash commodity transaction; and the proposed requirement that each record be maintained in a separately identifiable electronic file identifiable by transaction and counterparty. Many of the comments were directed specifically toward narrowing the scope of the proposed changes to regulation 1.35 regarding recording of oral communications and written communications (and related amendments to regulation 1.31).

7Commenters on this issue include: American Cotton Shippers Association; Agribusiness Association of Iowa; Agribusiness Association of Ohio; Agribusiness Council of Indiana; Trade Association of American Cotton Cooperatives; Commodity Markets Council; Falmouth Farm Supply; American Feed Industry Association; Grain and Feed Association of Illinois; Minnesota Grain and Feed Association; National Grain and Feed Association; Oklahoma Grain and Feed Association; Rocky Mountain Agribusiness Association; South Dakota Grain and Feed Association; Land O'Lakes; National Council of Farmer Cooperatives; American Gas Association; National Gas Supply Association; Fertilizer Institute; American Petroleum Institute; Electric Power Supply Association; National Rural Electric Cooperative Association; American Public Power Association; Large Public Power Council; Edison Electric Institute; Working Group of Commercial Energy Firms; IntercontinentalExchange Inc.; Kansas City Board of Trade; Minneapolis Grain Exchange; CME Group; Futures Industry Association; Barclays Capital; Henderson & Lyman; National Introducing Brokers Association; and National Futures Association.

The amendments adopted by this rulemaking primarily affect part 1 of the Commission's regulations, but also affect parts 4, 5, 7, 8, 15, 16, 18, 21, 22, 36, 41, 140, 145, 155, and 166. This rulemaking contains amendments of three different types: ministerial, accommodating, and substantive. Many of the amendments are purely ministerial—for instance, several changes update definitions to conform them to the CEA as amended by the Dodd-Frank Act; add to the Commission's regulations new terms created by the Dodd-Frank Act; remove all regulations and references pertaining to derivatives transaction execution facilities (“DTEFs”), a category of trading facility added to the CEA by section 111 of the Commodity Futures Modernization Act of 2000 (“CFMA”),8 which the DFA eliminated; correct various statutory cross-references to the CEA in the regulations; and remove regulations in whole or in part that were rendered moot by the CFMA.

8Public Law 106-554, 114 Stat. 2763 (2000).

The accommodating amendments are essential to the implementation of the DFA in that they propose to add swaps, swap markets, and swap entities to numerous definitions and regulations, but are more than ministerial because they require some judgment in drafting. Accommodating amendments include, among other things, amending numerous definitions in regulation 1.3 to reference or include swaps; creating new definitions as necessary in regulation 1.3; amending recordkeeping requirements to include information on swap transactions; adding references to swaps and swap execution facilities (“SEFs”) in various part 1 regulations; and amending parts 15, 18, 21, and 36 to implement the DFA's grandfathering and phase-out of exempt boards of trade and exempt commercial markets.

The substantive amendments are changes that align requirements or procedures across futures and swap markets. They consist of amendments to regulation 1.31 that harmonize some of the current part 1 recordkeeping requirements with some of those applicable to SDs and MSPs under part 23 regulations9 and amend procedures pertaining to the post-execution allocation of bunched orders (regulation 1.35(a)). Under the amendments to the bunched orders provisions, “eligible account managers” can allocate such orders post-execution similarly to how they currently do so with futures.

9 SeeSwap Dealer and Major Swap Participant Recordkeeping, Reporting, and Duties Rules; Futures Commission Merchant and Introducing Broker Conflicts of Interest Rules; and Chief Compliance Officer Rules for Swap Dealers, Major Swap Participants, and Futures Commission Merchants, 77 FR 20128 (Apr. 3, 2012) (adopting for SDs and MSPs reporting and recordkeeping standards now found in 17 CFR 23.201-23.203).

To aid the public in understanding the numerous changes to different parts of the CFTC's regulations adopted by this release, the Commission will also publish on its Web site a “redline” of the affected regulations which will clearly reflect the additions and deletions.10

10The redline does not, in and of itself, have any legal authority.

II. Comments Received and Amended Regulations A. General Comments

Several commenters argued that the Proposal was premature because many other rules remained to be proposed and finalized,11 and subsequent final rulemakings may dictate which conforming amendments will be necessary. A joint letter by certain Electric Utility Trade Associations (“the ETA”) contended that the incomplete nature of the swap regulatory regime renders it unable to “effectively comment,” because it lacks a full understanding of the entire swap regulatory landscape. In the ETA's view, the “premature” nature of the Proposal rises to the level of a violation of the Administrative Procedures Act (“APA”).12 The ETA commented further that because the Proposal updated certain regulations by treating swaps equivalently to futures, the Proposal “represents a fundamental misunderstanding” of the executing electric industry swap market, and, consequently, should be withdrawn. The ETA also noted that, “[f]rom time to time, the Commission's staff has declined to consider whether nonfinancial commodity and related swap markets are indeed different in any meaningful way from other markets,” and that the ETA “continues to urge the Commission to engage in a considered analysis of such differences and the implications of such differences for its rulemaking process.” The CME Group (“CME”) argued that the Commission should have waited to propose the voice and electronic recordkeeping requirements in regulation 1.35(a) until SEFs register, the Dodd-Frank Act clearing and exchange trading requirements take effect, and Dodd-Frank Act recordkeeping and reporting requirements take effect. The Electric Power Supply Association (“EPSA”) commented that final rules defining swap, SD, and MSP must be published prior to proposing a rule conforming the Commission's regulations to the Dodd-Frank Act and related regulations. Therefore, EPSA argued, the Proposal should be withdrawn. Mr. Chris Barnard generally supported the Proposal, commenting that the proposed changes were either common sense or required by the DFA.

11A joint letter by the American Gas Association, Commodity Markets Council, National Gas Supply Association, and the Fertilizer Institute (“AGA et al.”); Commodity Markets Council (“CMC”); Electric Power Supply Association; certain Electric Utility Trade Associations; and the Working Group of Commercial Energy Firms (“Working Group”).

12 SeeETA Letter (claiming that “[t]he [Proposal] cannot fairly apprise interested persons of the nature of the Commission's rulemaking, nor can it provide notice of `the terms of substance of the proposed rule or a description of the subjects and issues involved,' as required by the [APA], when the proposed rules purport to adapt to a moving target.”).

The Commission believes it was appropriate to have published the Proposal when it did. The purpose of this rulemaking is to conform the Commission's regulations to the CEA asrevised by the DFA where necessary (to avoid conflicting statutory and regulatory definitions of the same term, for example) or desirable (e.g.,to make retention periods for records of all swap transactions consistent with those recently adopted for the records of swap transactions of SDs). The Commission viewed many of these changes to be non-controversial. For example, the DFA amended the definition of FCM in section 1a of the CEA to permit FCMs to execute and clear swaps for customers in addition to futures. Accordingly, the Proposal updated regulation 1.3's definition of FCM, as well as recordkeeping requirements in regulations 1.31, 1.33, and 1.35, so that an FCM's duties with respect to swaps would mirror its duties with respect to futures. Because IBs and FCMs can execute or clear cleared swaps analogously to futures, the Commission believes that certain of the requirements in regulations 1.31, 1.33, and 1.35, which describe recordkeeping requirements for FCMs and IBs, can and should apply equivalently to an FCM's futures and cleared swaps business. In response to the ETA's comment that the Proposal inappropriately equated swaps with futures, the Commission notes that part 23 of the Commission's regulations addresses issues unique to the swap market by describing recordkeeping and other “business conduct” requirements for SDs and MSPs.

The Commission believes it is appropriate to make these conforming changes at this time. In adopting this final rule, the Commission is incorporating any changes necessitated by other final Dodd-Frank Act rulemakings.

B.Part 1 1. Regulation 1.3: Definitions a. General Changes

The Commission is revising regulation 1.3 so that its definitions, which are used throughout the Commission's regulations, incorporate relevant provisions of the DFA. For instance, amended regulation 1.3 updates current definitions to conform them to the Dodd-Frank Act's amendments of the same terms in the CEA's definitions section,13 and also includes definitions specifically added by the Dodd-Frank Act to the CEA. This is the case for many of the definitions in proposed regulation 1.3, including “commodity pool operator,” “commodity trading advisor,” “futures commission merchant,” “introducing broker,” “floor broker,” “floor trader,” “swap data repository,” and “swap execution facility.” For example, section 721(a)(5) of the DFA amended the definition of “commodity pool operator” (“CPO”) in CEA section 1a to add swaps to those contracts for which soliciting funds for a collective investment renders a person a CPO. Consequently, today's final rulemaking updates the definition of CPO in regulation 1.3 to match the DFA's new definition of that term. The Commission did not receive comments about the Proposal's revised definitions of “commodity pool operator,” “commodity trading advisor,” “futures commission merchant,” “floor broker,” “floor trader,” “swap data repository,” and “swap execution facility.” The Commission is adopting these definitions as proposed.

13CEA section 1a, 7 U.S.C. 1a.

In response to the proposed conforming amendments to the definition of “introducing broker,” Financial Services Roundtable (“FSR”) commented that a small commercial lender facilitating a swap transaction between a borrower and a third party, solely in connection with the lender's loan origination or syndication, should not have to register as an introducing broker (“IB”), but could possibly be required to do so under the amended definition. FSR commented further that such a result would be inconsistent with a 2004 staff no-action letter,14 in which the Commission's Division of Clearing and Intermediary Oversight explained that the purpose of registering and regulating IBs is to protect the public from sales abuses—according to FSR, such a concern does not exist in the situation FSR described. Specifically, FSR recommended that the Commission further define the term “introducing broker” to specifically exclude the lenders it described, or in the alternative, that the Commission issue interpretative guidance addressing this issue.

14CFTC No-Action Letter No. 04-34 at 3 (Sept. 16, 2004).

The Commission declines to further define the term “introducing broker” as FSR requested, and is adopting the term as proposed. However, the Commission believes that in the situation described by FSR, the small commercial lender would not be required to register as an IB, as long as it did not receive compensation from the third party with whom the lender arranges the borrower's swap. This analysis is based solely on the facts as presented by FSR in its comment letter and is consistent with previously issued staff no-action or interpretative letters.15 Staff can issue further guidance, as appropriate, on a case-by-case basis under regulation 140.99.16

15FSR stated that the lenders it described receive compensation “in connection with lending and retaining risk and not in connection with introducing a [swap provider].” A key element of both the previous and amended definitions of IB is that the person engages in the described conduct “for compensation or profit, whether direct or indirect.” 17 CFR 1.3(mm). This analysis is consistent with past Commission guidance requiring an individual to register as an IB based on referring customers to a commodity trading advisor and receiving compensation in return. CFTC Interp. Letter No. 86-27 (Introducing Broker Registration Requirements), Comm. Fut. L. Rep. (CCH) ¶ 23,364, CFTC (Nov. 24, 1986). This letter emphasized that “the presence or absence or[sic] per-trade compensation is not determinative of whether one falls within the definition of an introducing broker. The Commission's final rule expressly eliminated the form and manner of compensation as the principal measure of whether registration as an introducing broker would be required * * * [P]ursuant to the express terms of the introducing broker definition in rule 1.3(mm), any compensation (without regard to whether such compensation is per-trade or otherwise) for the solicitation or acceptance of orders * * * brings one within the definition.”Id.(footnotes omitted). Therefore, if the lenders FSR described receive compensation from the swap providers for their customer referrals, then the lenders would fall within the definition and be required to register as IBs.

16Separately, the Commission notes that the activity of an associated person “AP” of an SD may resemble the swap activity of an IB. The definition of IB in regulation 1.3(mm), as amended by today's final rule, excludes an AP, including an AP of an SD. Pursuant to paragraph (6) of the definition of AP in regulation 1.3(aa), an AP of an SD could be an agent of the SD while not an employee of the SD. This may be the case, for example, where an employee of an affiliate of the SD is authorized to negotiate swap transactions on behalf of the SD. Where such an agency relationship is present, the Commission would not consider the employer of such an AP of an SD to be an IB due to the activities of that AP of the SD.

Additionally, the Proposal revised the definition of “self-regulatory organization” (“SRO”) (regulation 1.3(ee)) to include SEFs, a new category of regulated markets under the DFA, and derivatives clearing organizations (“DCOs”). The Commission did not receive any comments concerning its proposal to amend this definition. Today's final rulemaking amends the definition of SRO by including SEFs. However, it does not amend the definition of SRO to include DCOs. Upon further reflection, the Commission has determined that the part 1 regulations applicable to SROs need not apply to DCOs in light of recently finalized regulations in part 39 implementing the Act's Core Principles for DCOs.17 For example, paragraph (6) of regulation 39.12(a) (“Participant and product eligibility”) requires a DCO to have the ability to enforce compliancewith its participation requirements and to establish procedures for the suspension and orderly removal of clearing members that no longer meet the requirements. Moreover, the Commission is in the midst of other rulemakings pertaining to the responsibilities of SROs and DCOs,e.g.,proposed regulations regarding the governance of DCOs.18

17DCO General Provisions and Core Principles, 76 FR 69334 (Nov. 8, 2011).

18Requirements for DCOs, DCMs, and SEFs Regarding the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);andGovernance Requirements for DCOs, DCMs, and SEFs; Additional Requirements Regarding the Mitigation of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011).

b. Various Amended and New Definitions (Regulation 1.3)

The Commission is (1) simplifying or clarifying certain existing regulation 1.3 definitions, and (2) adding several new definitions to regulation 1.3, pursuant to amendments to the CEA by the Dodd-Frank Act, existing regulations, and other amendments in the Proposal.

The term “contract market,” for instance, is not defined under the CEA, and is currently defined under regulation 1.3(h) as “a board of trade designated by the Commission as a contract market under the Commodity Exchange Act or in accordance with the provisions of part 33 of this chapter.” In certain provisions throughout the Commission's regulations, contract markets are also referred to as “designated contract markets.” Because both terms are used interchangeably within the regulations, the Commission has decided to revise the definition to mean contract market and designated contract market (“DCM”). Proposed regulation 1.3(h) contained one definition identified by the title “Contract market; designated contract market.” The proposed definition also corrected an erroneous cross-reference to part 33 as the regulations applicable to DCMs, which the Commission is correcting by changing it to a reference to part 38 of the Commission's regulations. No commenters addressed these changes. The Commission is adopting the definition in regulation 1.3(h) as proposed with one modification to reflect the fact that the Commission designates a board of trade as a contract market “under the Act and in accordance with part 38” as opposed to “under the Act or in accordance with part 38.”

The Proposal contained a similar clarification regarding the definition of “customer.” It simplified the definition of “customer” by combining two existing definitions, “customer; commodity customer” in regulation 1.3(k) and “option customer” in regulation 1.3(jj), and by adding swaps to the proposed definition. Therefore, the proposed definition included swap customers, commodity customers, and option customers, referring to them all with the single term, “customer.” Furthermore, the Commission proposed to revise all references to “commodity customer” and “option customer” throughout the Commission's regulations, but particularly in part 1, to simply refer to “customer.”19 The proposed revisions retained references to requirements specific to certain contracts.20 Today's final rulemaking revises the definition of “customer” (regulation 1.3(k)), as proposed, and deletes the definition of “option customer” (regulation 1.3(jj)), as proposed. The Commission did not receive comments about the proposed deletion of the term “option customer.”

19The Commission proposed to remove references to commodity customers and option customers, replacing them with references to simply “customer,” in the following regulations: 17 CFR 1.3, 1.20-1.24, 1.26, 1.27, 1.30, 1.32-1.34, 1.35-1.37, 1.46, 1.57, 1.59, 155.3, 155.4, and 166.5.

20For example, proposed regulation 1.33 (Monthly and confirmation statements) required an FCM to document a customer's positions in futures contracts differently from its option or swap positions. Proposed regulation 1.33 preserved these distinctions, even though it referred only to “customers” as opposed to “commodity customers,” “option customers,” and “swap customers.”

ETA commented that counterparties to electricity swap contracts are not customers analogous to futures customers, and, therefore, by expanding the “customer” concept to include entities that execute swaps, the Commission would impose “significant and inappropriate obligations” on swap counterparties. The Commission has decided to finalize the definition of customer, as proposed. ETA is correct that counterparties to bilaterally-executed swaps are principals, which is unlike trading futures, where FCMs are agents of their customers. However, FCMs will execute and clear swap transactions, as agents, equivalently to the manner in which they currently execute and clear futures transactions.

The Commission proposed to define the term “confirmation” to reflect its differing use in various regulations depending on whether a transaction is executed by an FCM, IB or CTA on the one hand, or by an SD or MSP on the other hand. In the first case, the registrant is acting as an agent. In the second, it is acting as a principal.21 No commenters addressed the proposed definition of “confirmation,” and the Commission has decided to adopt it as proposed.

21A single entity could be registered in more than one capacity, for example, as both an SD and a CTA. Which rules were applicable would depend on the capacity in which such an entity was performing a particular function.

The Commission proposed to add to regulation 1.3 a definition of the term “registered entity,” currently provided in CEA section 1a(40), as revised by the Dodd-Frank Act. The proposed definition of “registered entity” is identical to its CEA counterpart and would include DCOs, DCMs, SEFs, swap data repositories (“SDRs”) and certain electronic trading facilities. To correspond with this new definition, the Commission also proposed to replace the current “Member of a contract market” definition with a new definition of “Member,” in regulation 1.3(q), which would be nearly identical to the “Member of a registered entity” definition provided in CEA section 1a(34), also as revised by the Dodd-Frank Act.22 The proposed “Member” definition was broadened to accommodate newly established SEFs, and it includes those “owning or holding membership in, or admitted to membership representation on, the registered entity; or having trading privileges on the registered entity.” Additionally, for ease of reference, proposed regulation 1.3 added several terms defined under the CEA, using identical definitions, including “electronic trading facility,” “organized exchange,” and “trading facility.”

22In accordance with the removal of DTEF references from many other Commission regulations, the proposed “Member” definition would not include DTEF references currently in the definition of “Member of a registered entity” found in CEA section 1a(34).See7 U.S.C. 1a(34).

The ETA commented that the Commission should wait to define “registered entity,” “organized exchange,” “electronic trading facility,” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdiction over nonfinancial energy commodity swaps. According to the ETA, a SEF should not be deemed a registered entity. In addition, the ETA does not believe SEF participants should fall within the Commission's proposed definition of “member,” suggesting that it is inappropriate or premature to require SEF participants to have the same recordkeeping requirements as DCM members under regulation 1.35.

The Commission disagrees with the ETA's comment that it should wait to define the terms “registered entity,” “organized exchange,” “electronic trading facility” and “trading facility” until the Commission enters into an MOU with FERC and publishes rules defining the scope of its jurisdictionover nonfinancial energy commodity swaps. As explained in the Proposal, the definitions proposed for each of those terms are identical to their statutory definitions under the CEA. The Commission may further define these terms in the future if necessitated by an MOU with FERC or by Commission rules defining the scope of its jurisdiction over nonfinancial energy commodity swaps.

With respect to the ETA's assertion that SEFs should not be deemed “registered entities,” the Commission notes that SEFs are already deemed “registered entities” under section 1a(40) of the CEA. Lastly, the term “member,” as defined under the CEA, includes “with respect to a registered entity * * * an individual, association, partnership, corporation or trust * * * having trading privileges on the registered entity.”23 Accordingly, the CEA considers participants on a SEF “members” by virtue of their having trading privileges on the SEF. For the foregoing reasons, the Commission is adopting the definitions of “registered entity,” “organized exchange,” “electronic trading facility,” “trading facility,” and “member” as proposed.

23CEA section 1a(34), 7 U.S.C. 1a(34).

The Commission also proposed to add a definition of the term “order.” This term had not previously been defined by Commission regulations, although it is used in several of them,e.g.,17 CFR 1.35, 155.3, and 155.4. In light of this, and with the addition of new categories of registrants (SDs and MSPs) who act as principals rather than agents, clarification of this term is appropriate. No commenters addressed the proposed definition, and the Commission is adopting it as proposed.

Because proposed amendments to regulation 1.31 incorporated the term “prudential regulator,” as added to the CEA by the Dodd-Frank Act, the Commission proposed to define the term in regulation 1.3.24 The proposed definition of “prudential regulator” in regulation 1.3 is coextensive with the definition in section 1a(39) of the Act and lists the various prudential regulators. No commenters addressed this proposed definition, but the amendments to regulation 1.31 adopted today no longer reference the term “prudential regulator.” Nonetheless, the Commission has determined to adopt the definition as proposed, in anticipation of future rulemakings and regulations possibly using the term “prudential regulator.”

24Proposing Release, 76 FR at 33068 and 33070. Pursuant to proposed regulation 1.31, records of swap transactions must be presented, upon request, to “any applicable prudential regulator as that term is defined in section 1a(39) of the Act.” 33088.

The Commission also proposed to add the term “registrant” to regulation 1.3 so that certain regulations in part 1 could refer to various intermediaries (e.g.,FCMs, IBs, CPOs), their employees (associated persons), and other registrants (MSPs). Because the DFA created a definition of and several Commission regulations refer to “associated persons of swap dealers or major swap participants,” the Commission proposed to add that term to regulation 1.3 as well. No commenters addressed these changes, but the Commission will only be adopting the definition of “registrant” as proposed. Since the Proposal's publication, a separate final rulemaking establishing the registration process for SDs and MSPs amended the existing definition of “associated person” found in regulation 1.3(aa) to incorporate associated persons of SDs and MSPs in a manner consistent with CEA section 1a, as amended by the Dodd-Frank Act.25 In light of that rulemaking, the Commission is not adopting a separate definition of “associated person of swap dealers and major swap participants” in regulation 1.3.

25Registration of Swap Dealers and Major Swap Participants, 77 FR 2613, 2615 and 2625 (Jan. 19, 2012).

The Commission also proposed, and is hereby adopting, a definition of the term “retail forex customer” in regulation 1.3 because it appears in several regulations in part 1 and currently is only defined in part 5. The definition is identical in all material respects to the definition of this term as it currently appears in regulation 5.1(k).26 The Commission did not receive any comments to the Proposal's addition of a definition of “retail forex customer” to regulation 1.3.

2617 CFR 5.1(k) currently defines “retail forex customer” as “a person, other than an eligible contract participant as defined in section 1a(12) of the Act, acting on its own behalf and trading in any account, agreement, contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.” This final rulemaking amends the definition in part 5 only to reflect the renumbering of section 1a of the CEA by the Dodd-Frank Act, and adds an identically amended definition to regulation 1.3.See infraPart II.G.2.

The Commission is also finalizing the revised definition of “strike price” (regulation 1.3(kk)) as proposed so that this definition encompasses swaps in addition to futures. The Commission received no comments about this proposal.

c. Regulation 1.3(t): Open Contract

The Proposal changed the defined term from “open contract” to “open position” and added provisions for commodity option transactions and swaps. CME commented that it is unclear whether the proposed definition is intended to cover options on swaps. If so, then the word “commodity” should be deleted from the phrase, “commodity option transaction.” According to CME's comment letter to the Proposal, the Commission should also clarify whether, or which, options are covered by proposed paragraph (t)(3) (swaps). CME also argues that proposed paragraph (t)(3) does not adequately characterize open positions in cleared swaps. Proposed paragraph (t)(1)'s terminology, CME believes, more appropriately characterizes cleared swaps because, like futures, cleared swaps may be fulfilled by delivery or they may be offset.

The Commission has decided to finalize the definition with a few modifications. The final definition retains the original title of the term, “open contract.” It also narrows its applicability from all swaps to only Cleared Swaps, as regulation 22.1 defines that term.27

27Regulation 22.1 was promulgated as part of Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).

The Commission notes that the option component of the definition (paragraph (t)(2)) covers all options:i.e.,options on futures; options on swaps (“swaptions”); and options on commodities.28 In response to CME's comment, the Commission notes that although, pursuant to the Dodd-Frank Act, swaptions and options on commodities (other than options on futures) are swaps, it is nevertheless appropriate for the definition of “open contract” to describe them with language suitable only to options and not to other swaps. In other words, the definition of “open contract” merely describes types of contracts; it is not intended to classify these contracts for regulatory purposes or to elaborate on the definition of “swap,” which the Commission recently published in final form.29

28Section 4c of the CEA grants the Commission authority over all three of these categories of options.

29 SeeFurther Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13, 2012).

Because the only references in the regulations to the term “open contracts” apply to cleared contracts,i.e.futures contracts and Cleared Swaps, the final definition only includes Cleared Swaps in paragraph (t)(3). The final rule alsomodifies paragraph (t)(3) to reflect the fact that Cleared Swaps can be fulfilled by delivery or by offset against other Cleared Swaps, as is the case with futures. Thus, paragraph (t)(3) states in final form, “swaps that have not been fulfilled by delivery; not offset; not expired; and not been terminated.”

In the Proposal, pursuant to the revision of the definition of “open contract” in regulation 1.3(t), the Commission proposed to change “open contract” to “open position” in regulations 1.33 (“Monthly and confirmation statements”) and 1.34 (“Monthly record, `point balance' ”). The Commission did not receive comments about these changes. In light of the fact that the Commission is retaining the title “open contract,” in the final revisions to regulation 1.3(t), the Commission is preserving those references to “open contract” in regulations 1.33 and 1.34.30

30 See infrasection II.A.4. (discussing amendments to regulation 1.33).

d. Regulation 1.3(ll): Physical i. Proposal

As part of the Proposal, the Commission explained that current regulation 1.3(ll) defines “physical” as “any good, article, service, right or interest upon which a commodity option may be traded in accordance with the Act and these regulations.”31 The Commission noted that, other than the reference to options, the term “physical” was similar to the definition of “commodity” in regulation 1.3(e), which includes, in relevant part “all * * * goods and articles * * * and all services, rights and interests in which contracts for future delivery are presently or in the future dealt in.” The quoted portions of the “physical” and “commodity” definitions are effectively the same, differing only in the potential overlying instrument with respect to which the respective terms are defined. In addition, the Commission noted that the introductory language in regulation 1.3 provides that “[t]he following terms, as used in the rules and regulations of this chapter, shall have the meaning hereby assigned to them, unless the context otherwise requires.”32

31Proposing Release, 76 FR at 33068-69.

32 33069.

In the Proposal, the Commission also traced the history of the term “physical” in its regulations, noting that the definition of “physical” was first added to its regulations “to enable trading, on DCMs, in options to buy or sell an underlying commodity” and that the definition had not been substantively amended.33 The Commission added that, in 1982, when the Commission proposed to add the definition of “physical” to its regulations, “cash-settled futures on non-physical commodities had just been introduced in the form of the Chicago Mercantile Exchange's Eurodollar futures” and that, “[i]n that context * * * it made sense to name such options based on physical commodities, which constituted the vast majority of commodities covered by then-existing futures contracts.”34 While options may have primarily been written on physical commodities in 1982, the Commission noted in the Proposal that “[a]t present * * * options may be traded on both physically deliverable and non-physically deliverable commodities, such as interest rates and temperatures” and that, given that change, using the term “physical” to refer to an option on both physically deliverable and non-physically deliverable commodities may be confusing.35 The Commission added that the intended-to-be-physically-settled element of the forward exclusion from the swap definition “would be meaningless if `physical' included non-physical.”36

33 33069.

34 Id.

35 Id.

36 Id.

In light of (1) The overlapping definitions of “commodity” and “physical” in Commission regulation 1.3, (2) the fact that options now are written on a wide range of non-physical commodities, and (3) the Commission's desire that the term “physical” not be interpreted to permit cash settled transactions to rely on the forward exclusion from the swap definition (unless otherwise permitted by Commission interpretations with respect to such exclusion, such as those discussed in the Commission's rulemaking jointly (with the Securities and Exchange Commission) further defining “swap”), the Commission, in the Proposal, requested comment on various possible approaches to the definition of “physical” in regulation 1.3(ll). One possible approach on which the Commission requested comment was whether it should eliminate the definition, on the theory that its meaning is self-evident, and rely on the ability of interested parties to interpret the term “physical.” The Commission also requested comment on not amending the definition in reliance upon the introductory language in regulation 1.3, which applies the regulation 1.3(ll) definition of “physical” unless the context otherwise requires.

ii. Comments

Three commenters addressed the definition of physical in regulation 1.3(ll). The ETA commented that the proposed definition of “physical” should be withdrawn because addressing it in terms of swaps is premature prior to the Commission publishing the further definition of “swap,” including, in particular, defining the term “nonfinancial commodity,” which the ETA characterized as a key component of the forward exclusion from the swap definition. The ETA stated that, in proposing such a substantive rule, the Commission must explain how defining “physical” would affect all of its regulations and requested that the Commission re-propose any revised definition of “physical” with a “comprehensive analysis of the way such word, whether used as an adjective or an adverb, interrelates with the Dodd-Frank statutory term `nonfinancial commodity,' as well as the concepts of `cash market,' `physical market channels' and the `bona fide hedging exemption'.”

The Environmental Markets Association (“EMA”) believes that the “very broad” definition of the word “physical” in current Commission regulations “certainly” encompasses environmental commodities, which the EMA states are subject to the forward exclusion from the definition of swap. The EMA requested that the CFTC issue a final rule clarifying that environmental commodities are not swaps even though intangible, that they are nonfinancial commodities that can rely on the forward exclusion, and that intangibility of a commodity does not prevent it from being “physically settled.” The Coalition for Emission Reduction Policy (“CERP”) similarly argued that environmental and other intangible commodity transactions that result in actual delivery of a commodity, intangible or not, as opposed to transactions that settle in cash, can be subject to the forward exclusion because such transactions can be physically settled. CERP also claimed that the Commission's proposed interpretation of forward contracts in nonfinancial commodities in the definition of “swap” supports its interpretation of “physically settled” in that forward sales of environmental commodities are commercial merchandising transactions because both buyer and seller ultimately need and intend the transfer of ownership of the emission allowances or offset credits.

EMA also expressed that the Commission's request for comment with regard to whether the definition of “physical” should rely on the “common sense meaning” of the word was unclear. In particular, EMA argued that environmental commodities traded in the spot or forward markets are physically delivered via a registry or an exchange of paperwork and eventually consumed through retirement. Further, according to EMA, environmental commodities are goods because Uniform Commercial Code (“UCC”) section 2105(1) defines “good” as “anything that can be moved other than money.”

iii. Final Rules

The Commission is removing from regulation 1.3(ll) the definition of “physical,” which term will therefore have the meaning dictated by the context of the individual Commission regulations in which it appears. In addition, the Commission is adopting conforming changes to other regulations to address the deletion of the definition. The Commission is adopting these changes for ease of reference for market participants and to reduce confusion in interpreting the Commission's regulations, consistent with the spirit of Executive Order 13563, which seeks, among other goals, to eliminate agency regulations that have outlived their usefulness.37 As explained further below, these modifications are not intended to alter the substantive provisions of the Commission's regulations.

37 SeeExecutive Order 13563 of January 18, 2011, Improving Regulation and Regulatory Review, at section 6(a), 76 FR 3821, 3822 (Jan. 21, 2011) (stating “To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”).

When the Commission added the definition of “physical” to regulation 1.3 in 1982, the intent was to distinguish between options on futures contracts and other options subject to the Commission's jurisdiction; the Commission termed such other options “options on physicals.” The Commission added the “physical” definition because, while the 1982 rulemaking including provisions applicable both to DCM-listed options on futures and DCM-listed options on commodities, it also contained regulations applicable solely to options on futures. Thus, the purpose of the definition was “principally to enable the Commission to differentiate, where necessary, between references to options on physicals and options on futures contracts.”38 Although the intent of Commission regulation 1.3(ll) was only to address the distinction between options on futures and other options, the Commission believes that the use of such a broad term to apply to a narrow circumstance can create confusion because the definition is not expressly so limited. While the introduction to regulation 1.3 says that the definitions therein have the meanings set forth therein unless the context otherwise requires, determining when regulation 1.3(ll) applies as drafted and when the context dictates a different meaning can be subjective and result in confusion.

38Domestic Exchange-Traded Commodity Options; Expansion of Pilot Program To Include Options on Physicals, 47 FR 56996, 56998 (Dec. 22, 1982).

The Commission did not intend, when it promulgated the definition in regulation 1.3(ll), to apply it to circumstances such as the definition of “physically” settled. Given the intent of the definition of the term “physical” (to distinguish options on futures from other options) and the introductory language in regulation 1.3 regarding contextual interpretations of the defined terms therein, in regulations where it is not necessary to distinguish between different types of options, the definition of “physical” in Commission regulation 1.3(ll) is not useful and can be overbroad. For example, the definition of “physical” is not useful with respect to the term “physical safeguards” in regulation 160.30, which pertains to procedures to safeguard customer records and information. Because the scope of the definition of “physical” essentially includes options on any commodity, which would include non-physical commodities such as temperatures and interest rates, effectively, the restriction that “physical” in regulation 1.3(ll) is limited to any goods, article, service, right or interest upon which a commodity may be traded in accordance with the CEA and the Commission's regulations is not much of a restriction at all.

The Commission also notes that it recently promulgated final and interim final rules amending parts 32 and 33 of the Commission's regulations.39 While part 33 continues to address options on futures contracts, the other options subject to the Commission's jurisdiction that also were previously addressed in part 33 now are addressed in part 32 rather than in part 33. Further, the Commission no longer refers to such other options as “options on physicals.” Instead, the Commission generally uses the term “commodity option” as a reference to both options on futures and other CFTC-jurisdictional options. Where the Commission distinguishes the regulatory treatment for options on futures from the regulatory treatment of other options, it specifically identifies options on futures as “commodity option transactions on a contract of sale of a commodity for future delivery.” With these recent amendments, the definition of “physical” in regulation 1.3(ll) will not help to distinguish between options on futures and other commodity options because the rules generally addressing the regulatory treatment of other commodity options no longer use the term “physical” to refer to such transactions.

39Commodity Options, 77 FR 25320 (Apr. 27, 2012).

In light of these considerations, the Commission believes that deleting the definition of physical will reduce the potential for confusion on the part of market participants, as the appropriate definition of that term will be based on the context of the individual rules in which the term is utilized. These amendments will also serve the goals of Executive Order 13563 by amending the Commission's regulations because they no longer are “effective[] in achieving the objectives for which they were adopted.”40

40Reducing Regulatory Burden; Retrospective Review Under E.O. 13563, 76 FR 38328 (June 30, 2011).

Further, various Commission regulations relating to options also refer to a “physical” when discussing an option on a commodity. In order to conform those regulations with the adapting changes discussed above, the Commission is adopting a number of non-substantive changes including, but not limited to, replacing certain references to “physical” with references to “commodity.” Where appropriate, the Commission is also replacing references to “underlying physical” with references to “underlying commodity.”

For the reasons discussed above, these conforming amendments will not result in substantive changes. Therefore, the Commission is amending the following regulations as described above: Regulations 1.3(kk); 1.3(ll); 1.17(c)(1)(iii), (c)(5)(ii)(A), and (c)(5)(xiii)(C); 1.33; 1.34(b); 1.35(b)(2)(iii), (b)(3), (d) and (e); 1.39(a) and (a)(3); 1.46(a)(1)(iii) and (iv); 4.23(a) and (b); 4.33(b)(1); 15.00(p)(1)(ii); 16.00(a); and 16.01(a)(1)(ii) and (iv), and (b)(1)(ii) and (iv). The Commission is leaving unchanged other references to “physical” in its existing definitions because, given the context in which the term is used in those rules, suchreferences are limited to physical commodities.

The Commission is replacing the word “physical” in regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) with the word “commodity,” and is replacing the word “physical” in regulation 1.17(c)(5)(ii)(A) with the term “physical commodity.” In so doing, the Commission does not intend to change the meaning of any of these paragraphs. Thus, final regulations 1.17(c)(1)(iii) and 1.17(c)(5)(xi) will continue to apply to options that overly any commodity, not just a tangible commodity. By contrast, final regulation 1.17(c)(5)(ii)(A) will continue to apply to the options described therein, which cover tangible commodities only.

While some commenters requested that the Commission interpret “physical” for purposes of the term “physically settled” within the forward exclusion for swaps, or generally address the definition of “physical” as it relates to other terms, the Commission declines to do so for purposes of this release. The conforming amendments to the definition of physical are non-substantive changes that are designed to increase clarity for market participants. As noted above, rather than have a definition of physical that applies unless the context “otherwise requires,” the Commission will apply the definition based on the particular context of the applicable regulation. Because the current definition already applies in this manner, the modifications addressed herein do not amount to a substantive change in the regulations.

e. Regulation 1.3(ss): Foreign Board of Trade

The Commission proposed to amend the definition of foreign board of trade to mean “any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated where foreign futures, foreign options, or foreign swap transactions are entered into.” The Commission received no comments regarding the proposed definition of “foreign board of trade” and is modifying the proposed definition to make it consistent with the definition provided in the final rulemaking for Registration of Foreign Boards of Trade.41 Accordingly, new regulation 1.3(ss) defines the term “foreign board of trade” as “any board of trade, exchange or market located outside the United States, its territories or possessions, whether incorporated or unincorporated.”

41Registration of Foreign Boards of Trade, 76 FR 80674 (Dec. 23, 2011).

f. Regulation 1.3(yy): Commodity Interest

The Commission proposed adding “swap” to the definition of “commodity interest” in regulation 1.3(yy).42 Currently, commodity interest is defined as: “(1) Any contract for the purchase or sale of a commodity for future delivery; (2) Any contract, agreement or transaction subject to Commission regulation under section 4c or 19 of the Act; and (3) Any contract, agreement or transaction subject to Commission jurisdiction under section 2(c)(2) of the Act.” At the time of the proposal, the term was cross-referenced by 33 other Commission regulations and appendices to parts of Commission regulations.43 Generally, the term “commodity interest” is meant to encompass all agreements, contracts and transactions within the Commission's jurisdiction, though not all such agreements, contracts and transactions are expressly set forth therein.44

42Proposing Release, 76 FR at 33069.

43 See17 CFR 1.12, 1.56, 1.59, 3.10, 3.12, 3.21, 4.6, 4.7, 4.10, 4.12-4.14, 4.22-4.25, 4.30-4.34, 4.36, 4.41, 30.3, 160.3-160.5, and 166.1-166.3; 17 CFR pt. 3 app. B, 17 CFR pt. 4 app. A, and 17 CFR pt. 190 app. B.

44For example, the term “contract for the purchase or sale of a commodity for future delivery” in current regulation 1.3(yy)(1) encompasses security futures products. Similarly, the term “swap” would include mixed swaps (though mixed swaps are swaps, they also are security-based swaps, so the Commission shares authority over mixed swaps with the SEC). Of course, the impact of the scope of proposed regulation 1.3(yy) is only as extensive as the other regulations referencing it.

The Dodd-Frank Act added a definition of the term “swap” to the CEA.45 DFA section 712(d)(1) requires the Commission to further define the term “swap” jointly with the Securities and Exchange Commission (“SEC”), and the Commission has recently adopted regulations further defining the term “swap,” among other terms, jointly with the SEC.46

45DFA section 721(a)(21); codified at 7 U.S.C. 1a(47).

46Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (August 13, 2012) (adopting 17 CFR 1.3(xxx), which defines the term “Swap”).

In their comment letter, the ETA objected to the Proposal's addition of the term “swap” to the definition of commodity interest because, as dis