## Facts

- Cargill, Inc. is an agricultural, commodity, and financial-services company headquartered in Minnesota.
- Through its swaps business, Cargill offered commodity swaps to commercial customers as a service intended to help customers hedge commodity price risk.
- Cargill’s swap customers were largely producers or end users of the underlying commodities; some swaps were standardized, while others were complex and customized.
- Before Cargill registered as a swap dealer, it disclosed a value to customers that was based on amortizing Cargill’s expected revenue over the first 60 calendar days of a swap, rather than showing the full markup at inception.
- In 2013, when Cargill sought and obtained provisional registration as a swap dealer, it understood that the Commodity Exchange Act (CEA) and CFTC regulations required disclosure of an objective mid-market mark (a mark that excludes dealer profit and certain other adjustments) before execution and, for uncleared swaps, daily during the life of the swap.
- Cargill was concerned that using a true mid-market mark would reduce profitability and explored methods to calculate the mid-market mark for regulatory disclosure.
- Cargill did not seek interpretive guidance from the CFTC, even though it could have done so.
- Cargill adopted a marking method similar to its pre-registration approach: it recognized 10% of expected revenue on day one and amortized the remaining 90% over the next 60 days.
- As a result, the marks Cargill provided to counterparties at or near inception of the swap concealed most of Cargill’s expected revenue and were presented to customers without disclosure of the formula’s revenue component.
- Cargill personnel raised concerns internally that the methodology did not meet the mid-market mark requirements, but management declined to change the practice.
- The CFTC also identified failures to meet certain swap data reporting requirements for swaps involving counterparties eligible for the end-user exception.
- The matter resolved through a settled CFTC administrative order after Cargill submitted an Offer of Settlement, consenting to entry of findings and sanctions without admitting or denying the findings.

## Issues

1. Whether Cargill violated CEA § 4s(h)(1) and CFTC Regulation 23.431 by providing counterparties “mid-market marks” that included a portion of Cargill’s expected revenue and concealed the swap dealer’s markup at inception.
2. Whether Cargill violated CFTC Regulation 23.431(d) by failing to disclose material information about how its marks were calculated, including the economic incentive created by embedding expected revenue in the disclosed marks.
3. Whether Cargill violated CFTC Regulation 45.4(d)(2) by failing to satisfy swap data reporting duties for certain swaps with end-user exception–eligible counterparties.
4. Whether Cargill violated CFTC Regulation 166.3 by failing to diligently supervise its swap dealer activities relating to mid-market mark disclosures and swap data reporting.

## Decision

- The CFTC instituted and resolved the administrative proceeding through a settled order accepting Cargill’s Offer of Settlement.
- The CFTC found Cargill violated CEA § 4s(h)(1) and CFTC Regulations 23.431(a) and 23.431(d) by providing marks labeled or treated as mid-market marks that incorporated Cargill’s expected revenue and did not provide customers an objective mark as required.
- The CFTC found Cargill violated CFTC Regulation 45.4(d)(2) based on failures to comply with required swap data reporting for certain end-user exception–eligible counterparties.
- The CFTC found Cargill violated CFTC Regulation 166.3 by failing to diligently supervise officers, employees, and agents in connection with the noncompliant marking method and related compliance obligations.
- The order required Cargill to cease and desist from further violations, pay a $10 million civil monetary penalty, and complete undertakings aimed at strengthening controls for mark disclosures, reporting, and supervision.

## Legal Principles

- A swap dealer must provide counterparties an objective mid-market mark that excludes dealer profit and other specified adjustments; a mark designed to defer or mask the dealer’s expected revenue is not a compliant mid-market mark under CEA § 4s(h)(1) and Regulation 23.431.
- Regulation 23.431 requires disclosure of material information related to the swap and the swap dealer’s incentives or conflicts; withholding the fact that the disclosed mark embeds expected revenue can violate these disclosure duties.
- Swap dealers must comply with Part 45 swap data reporting rules; failures to report required data for swaps with end-user exception–eligible counterparties can violate Regulation 45.4(d)(2).
- Regulation 166.3 imposes an affirmative duty on registrants to diligently supervise their business activities; allowing a noncompliant marking method to continue after internal concerns are raised can support a supervision violation.
- In a settled CFTC administrative order, the Commission may make findings and impose sanctions and undertakings based on a respondent’s consent, without a contested merits decision.

## Conclusion

In the Matter of Cargill, Inc. resulted in a settled CFTC order finding that Cargill, acting as a swap dealer, disclosed amortized marks that included expected revenue and therefore were not compliant mid-market marks, failed to meet certain swap data reporting obligations, and did not diligently supervise these activities; the CFTC imposed a $10 million penalty, cease-and-desist relief, and compliance undertakings.


In the Matter of Cargill, Inc., CFTC Docket No. 18-03 (2017)