The CFTC has proposed to reduce the burden on parties to commodity trade options that are not swap dealers or major swap participants, including end-users (“non-SD/MSPs”), in response to comments that the current regulations are costly and burdensome. The proposed regulations would relieve non-SD/MSPs of the requirement to report trade options under any circumstances. In addition, the rules would eliminate the annual Form TO filing requirement and in its place, formalize the requirement to notify the CFTC’s Division of Market Oversight (“DMO”) if non-SD/MSPs enter into trade options with an aggregate notional value in excess of $1 billion in any calendar year.
Under the current regulations, trade options must be reported to a swap data repository (“SDR”) if either counterparty has been required to report non-trade option swaps during the preceding 12 months. The party whose earlier reporting obligation triggered the requirement to report the trade option is responsible for reporting the trade option. If both parties had previously reported swaps, the hierarchy established in the CFTC’s part 45 rules determines the reporting counterparty. Under these regulations, if two non-SD/MSPs are party to a trade option, one of the parties could be required to report the trade option to an SDR. The proposed regulations would relieve parties of this burden by providing that a non-SD/MSP will not be required to report trade options to an SDR under any circumstances.
The CFTC currently requires a party to trade options that have not been reported to an SDR to make an annual filing on Form TO setting forth the total value of the trade options exercised in the preceding year. While the CFTC intended this filing obligation to be “minimally intrusive,” in practice, it has discouraged non-SD/MSPs from entering into trade options, which decreases market liquidity and removes a valuable risk management tool. Form TO, while relatively simple on its face, requires trade option counterparties to track their transactions in a manner that their current systems often do not support. In recognition of this burden, the proposed regulations would eliminate the Form TO filing entirely.
In place of the Form TO, the proposed regulations would formalize the requirement established in No-Action Letter 13-08 to notify DMO within 30 days after entering into trade options that have an aggregate notional value in excess of $1 billion in any calendar year. The proposed regulations would value the trade options by multiplying the maximum volume by the strike or exercise price per unit of the commodity. Where the strike or exercise price is not fixed, it should be valued according to the market value at the time the trade option is executed, rather than at the time of exercise.
The proposed regulations also would clarify that non-SD/MSPs are not required to identify their trade options in their records using a unique swap identifier or unique product identifier.
The proposed regulations are available here. Comments are due by June 8, 2015. Please contact Elaine Walsh, Greg Wagner or your Baker Botts relationship lawyer with questions or if you are interested in filing comments on the proposed regulations.