On March 16, 2016, the Commodity Futures Trading Commission (“CFTC”) approved a final rule (“Final Rule”) eliminating certain reporting and recordkeeping requirements for “trade option”[1] counterparties that are neither “swap dealers” nor “major swap participants” (“Non-SD/MSPs”).[2] The Final Rule is briefly summarized below.

Commodity options are included in the definition of “swap” under the Commodity Exchange Act, as amended by the Dodd-Frank Act (“CEA”),[3] and, as such, absent an exemption, are subject to the various requirements thereunder applicable to swaps. However, a CFTC interim final rule issued in April 2012 (the “2012 Trade Option Exemption”) exempts a commodity option transaction from certain swap requirements if the following requirements are satisfied: (i) the offeror of the option is either an “eligible contract participant” as defined in section 1a(18) of the CEA or a commercial participant (a producer, processor, commercial user of, or merchant handling, the underlying physical commodity and be entering into the option solely related to its business as such); (ii) the offeree of the option is a commercial participant; and (iii) the parties intend to physically settle the option so that, if exercised, the option would result in the sale of a nonfinancial commodity for immediate (i.e., spot) or deferred (i.e., forward) shipment or delivery.[4]

The 2012 Trade Option Exemption did not exempt a qualifying commodity option (a “trade option”) from all swap requirements; rather, reporting, recordkeeping, position limits, and certain other requirements generally remained applicable. In fact, these requirements continued to exist even for qualifying trade options between Non-SD/MSPs. However, No-Action Letter No. 13-08, which was issued after the 2012 Trade Option Exemption, provided the following relief with respect to a trade option between Non-SD/MSPs:

  1. In lieu of the reporting requirements that would otherwise apply, a counterparty may report the trade option transaction on Form TO by March 1 following the calendar year in which the trade option was entered into.
  2. As a condition for the foregoing reporting relief, the counterparty must notify the CFTC, through an email to TOreportingrelief@cftc.gov, no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year.[5]
  3. Each counterparty may comply with the recordkeeping requirements by keeping basic business records (i.e., “full, complete and systematic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty”).

The Final Rule eliminates various requirements from the 2012 Trade Option Exemption and withdraws No-Action Letter No. 13-08 in its entirety. Specifically, pursuant to the Final Rule, a Non-SD/MSP counterparty entering into a trade option is no longer required to: (i) report the trade option on Form TO; (ii) notify the CFTC after entering into trade options exceeding $1 billion in aggregate notional value; or (iii) comply with any recordkeeping requirements (other than obtaining and providing a legal entity identifier to any SD or MSP counterparty). Additionally, the Final Rule eliminates the requirement that trade options are subject to position limits. The Final Rule became effective upon its March 21, 2016 publication in the Federal Register.