On November 3, 2014, the CFTC held an open meeting to consider three proposed rule amendments addressing the residual interest deadline (CFTC Rule 1.22), recordkeeping requirements for commodity interest and related cash or forward transactions (CFTC Rule 1.35), and forward contracts with embedded volumetric optionality (CFTC Products Release). In passing the amendments, the CFTC, acting under a new chairman, demonstrated a willingness to re-visit prior rulemaking under the Dodd-Frank Act.
In regard to CFTC Rule 1.22, the most recent proposal sought to eliminate the automatic termination of the 6:00 pm residual interest deadline, and rather require a formal rulemaking proceeding if the CFTC later determines to adjust the time after studying the impact of the 6:00 p.m. deadline.
The second proposal addressed recordkeeping requirements and sought to amend the CFTC’s recordkeeping requirements under Rule 1.35(a) to limit the requirement that records must be “identifiable and searchable” to merely “searchable.” The revisions also clarified that “searchable by transaction” does not include all oral and written communications leading to the execution of a transaction. Those communications must still be searchable, but need not be kept in a form and manner that identifies the particular transaction that the communication is related to.
The final proposal sought to clarify the embedded volumetric optionality test used to determine if a particular transaction falls within the forward contract exclusion from the definition of a swap. The proposal modified the fourth, fifth, and seventh elements of the 7-part test applied to determine when contracts fall within the forward contract exclusion. Most significantly, the seventh factor was broadened so that “physical factors” could be construed to include any factor that could reasonable influence supply or demand of the commodity under the contract, such as environmental issues, operational considerations, social forces, geopolitics, and more. The definition would still exclude concerns about price risk. Commissioners Giancarlo and Wetjen expressed support and anticipated additional clarification during the comment period and rulemaking. Though Commissioner Bowen had previously made clear during her opening statements that she preferred the trade option exemption because it would provide “a much clearer and cleaner approach to address the issues raised regarding volumetric optionality,” she nevertheless voted yes to the proposed rule. The final proposal was passed 4-0.