The Commodity Futures Trading Commission has published its tenth series of proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rule proposals relate to commodity options and agricultural swaps and to the termination provisions of swap transactions entered into by swap dealers (SDs) and major swap participants (MSPs).

  • Proposed Changes to Regulations Concerning Swaps on Agricultural Commodities and Commodity Options: Section 723(c)(3) of the Dodd-Frank Act prohibits swaps on agricultural commodities unless such swaps are entered into pursuant to a rule, regulation or order of the CFTC adopted pursuant to Section 4(c) of the Commodity Exchange Act (CEA), which grants the CFTC certain exemptive authority. Under the Dodd-Frank Act, commodity options (other than options on a futures contract) are included in the definition of "swap."

Currently, Part 32 of the CFTC regulations governs over-the-counter (OTC) commodity options, Part 33 governs exchange-traded options on futures contracts and on physical commodities, and Part 35 governs swaps, including swaps on agricultural products. Part 32 distinguishes between OTC "trade options" on non-agricultural commodities and trade options on certain enumerated agricultural commodities. Each of these different classes of instruments is currently subject to a different regulatory regime.

The CFTC is proposing to revise Part 32, Part 33 and Part 35 to create a uniform regulatory regime for all commodity swaps and all commodity options (including agricultural and non-agricultural swaps and options). In particular, the CFTC proposes to:

  1. Revise Part 35 to make it applicable solely to agricultural swaps. As revised, Part 35 would provide that agricultural swaps are subject to the same requirements as other swaps under the CEA (as amended by the Dodd-Frank Act) and any rules, regulations or orders thereunder.
  2. Amend Part 32 to eliminate the distinction between agricultural trade options and other trade options and to affirm that all commodity options (other than options on futures contracts) are "swaps."
  3. Revise Part 33 to delete references to exchange-traded options on physical commodities, which would now be regulated as swaps.
  • "Orderly Liquidation" Termination Provisions: Section 731 of the Dodd-Frank Act directs the CFTC to "adopt rules governing documentation standards" for SDs and MSPs. The CFTC has now proposed rules to supplement its previous proposal concerning swap documentation by requiring such documentation to include a provision confirming each counterparty's understanding of how the orderly liquidation authority under Title II of the Dodd-Frank Act (Title II) and the Federal Deposit Insurance Act (FDIA) may affect the parties' OTC swap transactions.

Title II and the FDIA vest the Federal Deposit Insurance Corporation (FDIC) with the authority to perform an orderly wind-down and liquidation of a "covered financial company"—in essence, a company that is predominantly engaged in financial activities, which activities generate at least 85% of the company's revenues, and as to which the FDIC and the Board of Governors of the Federal Reserve System have made a determination that the company is in danger of default, which default would have a "serious adverse effect" on the financial stability of the United States. The FDIC could in such a case transfer swaps (as well as certain other contracts), claims and collateral to a solvent third party financial institution. The FDIC has until 5:00 p.m. on the business day following the day on which it is appointed as receiver to complete such a transfer, during which time neither party to the swap may exercise any right to terminate the transaction or liquidate or net out its positions. The CFTC's proposal would require that the parties to a swap agree in writing to comply with the FDIC's transfer authority and consent to such a transfer and the stay on exercising their contractual rights in connection with the swap.

Comments on the proposed rules are due within 60 days from the dates of their publication in the Federal Register. Information regarding the tenth series of CFTC proposals, including the CFTC releases and fact sheets and Q&As for each of the proposals, is available here.