On April 30, 2015, the Commodity Futures Trading Commission (“CFTC”) issued a notice of proposed rulemaking (“NOPR”) proposing to reduce certain reporting and recordkeeping requirements for end users. Notably, the NOPR proposes to eliminate the Form TO filing requirement and the Part 45 swap reporting requirement for end users in connection with trade options, while requiring end users to notify the CFTC if their trade option transactions have, or, alternatively, are expected to have, an aggregate notional value in excess of $1 billion in any calendar year.
Pursuant to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and the CFTC’s incorporating rules and regulations, commodity options generally are subject to regulation as swaps (unless such options are excluded – such as certain forward contracts with embedded volumetric optionality). In 2012, the CFTC issued an interim final rule providing for light-handed regulation for qualifying “trade options” by exempting them from the majority of otherwise applicable swap regulations. The interim final rule – codified in section 32.3 of the CFTC’s regulations – provides that the trade option exemption will apply if a commodity option transaction meets the following requirements:
- The offeror is either an eligible contract participant (“ECP”) or a producer, processor, commercial user of, or merchant handling the commodity that is the subject of the commodity option transaction, or the products or byproducts thereof (a “commercial party”) that offers or enters into the commodity option transaction solely for purposes related to its business as such;
- The offeree is, and the offeror reasonably believes the offeree to be, a commercial party that is offered or enters into the transaction solely for purposes related to its business as such; and
- The option is intended to be physically settled so that, if exercised, the option would result in the sale of an exempt or agricultural commodity for immediate or deferred shipment or delivery
Through the trade option exemption, the CFTC sought to lessen the regulatory burden on those parties that hedge or otherwise enter into commodity option transactions for commercial purposes. To that end, commodity option transactions meeting the above criteria have been exempted from most provisions of the Commodity Exchange Act and the CFTC’s rules and regulations that are applicable to swaps, subject to the conditions of sections 32.3(b)-(d) of the CFTC’s regulations, including certain Part 45 recordkeeping and reporting requirements, large trader reporting requirements, antifraud and anti-manipulation provisions, and certain other obligations and duties applicable only to swap dealers (“SDs”) and major swap participants (“MSPs”).
In addition, in April 2013, the CFTC’s Division of Market Oversight (“DMO”) – through a no-action letter – provided further relief to end users (although DMO’s position is not binding on the Commission) from certain section 32.3 reporting and recordkeeping requirements. Under section 32.3(b), if one counterparty to a trade option (whether as buyer or seller), in connection with any non-trade option swap, had become obligated to comply with the Part 45 swap reporting requirements as a reporting party during the 12-month period preceding the date on which the trade option was entered into, then the trade option must be reported pursuant to Part 45. DMO’s no-action relief provided end users relief from this Part 45 reporting requirement for trade options, provided such end users (1) annually file with the CFTC Form TO – “Annual Notice Filing for Counterparties to Unreported Trade Options” – which includes basic information regarding the end user’s firm and its use of trade options during the previous calendar year, and (2) notify DMO no later than 30 days after an end user has entered into trade options having an aggregate notional value in excess of $1 billion in any calendar year. In addition, DMO provided end users relief from certain Part 45 recordkeeping requirements other than section 45.2, which requires maintenance of full and complete records, and section 45.6, which requires an end user to obtain and provide to an SD or MSP counterparty a legal entity identifier (“LEI”).
The April 30, 2015, NOPR included four substantive proposals:
First, the CFTC proposed to eliminate the Part 45 reporting requirement for end users in connection with trade options. This proposal essentially formalizes the no-action relief that DMO provided from the Part 45 reporting requirement in April 2013.
Second, the CFTC proposed to eliminate the Form TO filing requirement applicable to end users so that such end users would not be required to report otherwise unreported trade options. Although the CFTC believes there are some surveillance benefits from Form TO data, it recognizes that Form TO imposes costs and burdens on end users, particularly smaller end users. The CFTC also noted that the section 45.2 recordkeeping requirements – which require market participants to maintain full and complete records and to open their records to inspection upon the Commission’s request – remain applicable to end users, allowing the CFTC to collect additional information concerning unreported trade options as necessary.
Third, the CFTC proposed to amend section 32.3 of its regulations to require end users to provide notice to DMO within 30 days after entering into trade options, whether reported or unreported, that have an aggregate notional value in excess of $1 billion in any calendar year. In the alternative, end users may provide notice to DMO if they reasonably expect to enter into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year. This proposal also incorporates a modified version of the notice requirement in DMO’s April 2013 no-action relief.
Fourth, and also consistent with DMO’s April 2013 no-action relief, the CFTC proposed to amend section 32.3(b) of its regulations to clarify that, generally speaking, only the section 45.2 recordkeeping requirements will apply to end users in connection with trade options, and not the additional section 45.5 and 45.7 requirements regarding the use of unique swap identifiers (“USIs”) and unique product identifiers (“UPIs”), respectively. However, an end user still must obtain an LEI pursuant to section 45.6 and provide such LEI to its counterparty if that counterparty is an SD or MSP.
The public comment period for the NOPR will remain open until 30 days from the date the NOPR gets published in the Federal Register. Any final rule will be issued following the close of the comment period. These proposed changes provide end users a welcome reduction in reporting obligations for their physically settled trade options