Agricultural Swaps Regulation

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Gavel.png FINAL RULE: The CFTC issued its final rule on Agricultural Swaps at its August 4, 2011 open meeting.
Gavel.png FINAL RULE: The CFTC issued its final rule on Commodity Options at its April 18, 2012 open meeting.[1]
Dodd-Frank Timeline, Commodity Options and Agricultural Swaps
Final Rule-Swaps Effective Date - Swaps Effective Date-Options
August 10, 2011 December 31, 2011 June 26, 2012
Dodd-Frank Timeline, Agricultural Swaps
Final Rule Issue Effective Date No-action Deadline
August 10, 2011 December 31, 2011 December 31, 2012
Dodd-Frank Timeline, Agricultural Commodities Definition
Proposal Date Final Rule Effective/Compliance Date
October 26,2010 July 13, 2011, September 12, 2011

On August 4, 2011, the CFTC held an open meeting to discuss three final rulemakings under the Dodd-Frank Act. Among the rules approved at the meeting was a final rule regarding agricultural swaps. Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:

  • New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
  • New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
  • At the August 4 meeting, the Commission only finalized the agricultural swaps piece of the proposed rules (repealing and replacing Part 35). The commodity options final rule was approved at a CFTC Open Meeting, April 18, 2012. [2] [3]

Note: The compliance date was scheduled for October 12, 2012, the date at which swaps definitions rules became effective. On October 12, the CFTC issued no-action relief until December 31, 2012, in order to give participants additional time to transition in an orderly manner.

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Background

A swap is a privately negotiated exchange of one asset or cash flow for another asset or cash flow. In a commodity swap (including an agricultural swap), at least one of the assets or cash flows is related to the price of one or more commodities. The Dodd-Frank Act requires most swaps to be traded on an exchange or on a similar system (a "Designated Contract Market") and then guaranteed by a clearinghouse, where the parties would be required to post collateral. [4]

The Commodity Futures Trading Commission ("Commission" or "CFTC") is charged with proposing rules to implement new Dodd-Frank provisions, including rules regarding swaps in “agricultural commodities” (as defined by the Commission). The commission first addressed the issue of agricultural swaps at the CFTC Open Meeting, October 19, 2010 (the Second Series of Proposed Rules under the Dodd-Frank Act). At issue were two considerations:

  • An advance notice of proposed rulemaking (“ANPRM”) requesting comment on the appropriate conditions, restrictions or protections to be included in any such rule, regulation or order governing the trading of agricultural swaps. The open period for comments began on September 28, 2010, and closed on October 28, 2010. For more information, see Agricultural Swaps Regulation - ANPRM
  • A proposal defining "agricultural commodities" under the Dodd-Frank Act. Since the trading of agricultural swaps will be affected by these new regulations, formal definitions were required. For more information, see Agricultural Commodities Definition Regulation.

The CFTC proposed a set of rules regarding commodity options and agricultural swaps at its January 20, 2011 open meeting. The rules appeared in the Federal Register on February 3, 2011. Under the proposal, commodity options and swaps on agricultural commodities (as defined by an earlier proposal, Agricultural Commodities Definition), in the same manner as other swap products, and subject to the same regulatory treatment under other provisions in the Dodd-Frank Act. This definition of "swap" would also include agricultural "options." Some exceptions, such as for options on a futures contract traded on a designated contract market (DCM), will remain in place. The public comment period was April 4, 2011. Related documents from the January 20, 2011 meeting can be found below.

According to the CFTC, the definition of "agricultural commodity" includes the following commodities that are currently the subject of derivatives trading, whether listed for trading on a futures exchange or traded bilaterally OTC: (1) The enumerated commodities that are listed in current § 1a(4) of the CEA (e.g., corn, wheat, soybeans, livestock, cotton); (2) the international "soft commodities' (e.g., coffee, sugar, cocoa); (3) lumber, plywood and similar wood-derived commodities; (4) contracts based on underlying commodities listed in (1)-(3) (e.g., corn and wheat basis swaps and calendar swaps); and (5) other commodities derived from living organisms, including plant, animal or aquatic life, that are used for human food, animal feed or fiber, and that currently are the subject of derivatives trading.[5]

The original proposal, fact sheet, and Q&A can be found here.

References

  1. CFTC to Hold Open Meeting to Consider Two Final Rules. CFTC. Retrieved on April 18, 2012.
  2. Open Meeting on Three Final Rule Proposals under the Dodd-Frank Act. CFTC. Retrieved on August 4, 2011.
  3. Final Rulemaking Regarding Agricultural Swaps. CFTC. Retrieved on August 4, 2011.
  4. 72 FR 66099, note 7. Federal Register. Retrieved on January 24, 2011.
  5. Agricultural Swaps. Federal Register. Retrieved on January 24, 2011.

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