Haynes and Boone's Newsroom
Update on CFTC Rulemaking Regarding Agricultural Swaps and Commodity Options
Brian Y. Sung
The Commodity Futures Trading Commission (“CFTC”) has finalized two rules to authorize swaps (other than options) in agricultural commodities which will (i) correct existing inconsistencies, bring the regulation of agricultural swaps in line with the regulation of all other swaps under the CFTC’s jurisdiction1, and clarify that agricultural swaps may be listed or traded on swap execution facilities or designated contract markets, and (ii) provide a definition for regulatory purposes of the term “Agricultural Commodity.” The changes effected through these final rules should benefit participants in the agricultural swaps market by providing legal certainty and simplifying counterparty and regulatory diligence procedures.
As a result of amendments to the Commodity Exchange Act (the “CEA”) made pursuant to the Dodd-Frank Act:
- with limited exceptions, swaps and options in an “Agricultural Commodity” (to be defined by the CFTC) are prohibited unless entered into pursuant to a rule, regulation or order of the CFTC adopted pursuant to its exemptive authority under Section 4(c) of the CEA2, and
- a swap execution facility (“SEF”)3 may not list for trading or confirm the execution of any swap or option in an Agricultural Commodity except pursuant to a rule or regulation of the CFTC allowing the swap under such terms and conditions as the CFTC shall prescribe4.
In order to address these concerns and to rationalize the treatment of agricultural swaps under the post-Dodd-Frank Act regulatory framework, the CFTC recently promulgated final rules to authorize swaps in Agricultural Commodities (the “Agricultural Swaps Final Rules”) and to establish a definition of the term Agricultural Commodity (which had been previously undefined) for such purpose. The CFTC had also issued proposed rules earlier this year to authorize commodity options, including options in Agricultural Commodities, but excluding options on futures (the “Commodity Options Proposed Rules”), but has elected to postpone finalization of the Commodity Options Proposed Rules until later this year.
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PDF - CFTC_Rulemaking_Agricultural_Swaps.pdf
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Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act
”), the CFTC and the Securities and Exchange Commission (“SEC
”) have been granted regulatory authority over, respectively, “swaps” and “security-based swaps” (as defined in Section 721 and Section 761, respectively, of the Dodd-Frank Act, and as to be further defined pursuant to rulemaking by the CFTC and the SEC, in consultation with the Board of Governors of the Federal Reserve System). Except as otherwise noted, references herein to “swaps” are to swaps under the jurisdiction of the CFTC pursuant to its authority under the Dodd-Frank Act. 2
Dodd-Frank Act, Section 723(c)(3). Note that certain agricultural swaps (those that satisfy the requirements of the existing Part 35 rules, as more fully described below, and that were in place on the date of enactment of the Dodd-Frank Act) are grandfathered under Section 723(c)(3) and exempt from this prohibition. 3
SEF is defined in Dodd-Frank Act, Section 721, as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that (A) facilitates the execution of swaps between persons; and (B) is not a [DCM].” 4
CEA, Section 5h(b)(2), added by Dodd-Frank Act, Section 733. Pursuant to Section 721(a) of the Dodd-Frank Act, options in futures are not included within the category of swaps or options in Agricultural Commodities for which CFTC rulemaking is required under Section 5h(b)(2) of the CEA or Section 723(c)(3) of the Dodd-Frank Act; for the avoidance of doubt, any reference in this memorandum to options in Agricultural Commodities shall be deemed to exclude options in futures.