THE DELTA REPORT
On March 16, 2016, the Commodity Futures Trading Commission ("CFTC") approved a final rule ("TO Final Rule")1 that amends its trade option exemption regulation by eliminating reporting and recordkeeping requirements for trade option counterparties that are not swap dealers ("SD") or major swap participants ("MSP").
Commodity options constitute "swaps" under Section 1a(47) of Commodity Exchange Act (the "CEA") and must be in compliance with rules or regulations applicable to any other swap. However, the CFTC provides for exemption from many of such requirements if a commodity option transaction meets the following requirements ("trade option exemption"):
(a) it is offered by 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;
(b) it is offered to (and the offeror reasonably believes that it is offered to) a commercial party solely for purposes related to its business as such; and
(c) the option is intended to be physically settled so that, if exercised, the option would result in the sale of an exempt or agriculture commodity for immediate or deferred shipment or delivery.
Commodity options that fall within the trade option exemption are generally exempt from rules and regulations otherwise applicable to swaps.
However, prior to the TO Final Rule, trade options that met the trade option exemption were still subject to reporting requirements pursuant to part 45 of CFTC regulations if at least one of the non-SD/MSP counterparties had become obligated to comply with part 45 reporting requirements in the preceding 12-month period in connection with a non-trade option swap trading activity.
If neither counterparty to a trade option had been obligated to report pursuant to part 45, each counterparty to an otherwise unreported trade option was required to submit an annual Form TO to the CFTC, providing notice that the counterparty has entered into unreported trade option(s) during the prior calendar year.
The CFTC had provided some regulatory relief to commercial participants through CFTC No-Action Letter No. 13-08, which expanded eligibility to submit Form TO in lieu of reporting commodity option transactions under part 45, if the party that would have otherwise been required to report trade options is a non-SD/MSP. The party was also required to notify the CFTC Division of Market Oversight ("DMO") within 30 days of entering into trade options having an aggregate notional value of $1 billion during any calendar year.
Counterparties to trade options that met the trade option exemption were also subject to swap data recordkeeping requirements of part 45, as otherwise applicable to any other swap.
In an effort to ease the burden of commercial end users, in April 2015, the CFTC issued a proposal to reduce the reporting and recordkeeping requirements applicable to trade option counterparties that are non-SD/MSPs ("TO Proposal").2
The Final Rule
The TO Final Rule removes reporting requirements for non-SD/MSP trade option counterparties altogether, whether under part 45 or through Form TO. The use of Form TO has been completely eliminated. The CFTC also declined to adopt the notice requirement that was part of the TO Proposal, where non-SD/MSPs that enter into trade options that have (or is expected to have) an aggregate notional value over $1 billion in any calendar year had to notify the DMO. The CFTC stated that the data would have provided limited surveillance and oversight value that was not commensurate to market participants' difficulty in tracking and valuing trade options.
The TO Final Rule also eliminates recordkeeping requirements for trade option counterparties that are non-SD/MSPs. Here again, the TO Final Rule went further than the TO Proposal, which would have still required the non-SD/MSP counterparties to comply with applicable recordkeeping provisions of CFTC regulation §45.2. Though when transacting trade options with SD/MSPs, non-SD/MSP counterparties must obtain and provide a legal entity identifier.
The TO Final Rule also made a technical amendment to §32.3(c), deleting a reference to part 151 position limits, which has been vacated. The CFTC also stated that “federal speculative position limits should not apply to trade options” and that the matter would be addressed in the context of future position limit rulemaking.
CFTC No-Action Letter No. 13-08 is no longer applicable and was withdrawn as the TO Final Rule took effect.
1 Trade Options, 81 FR 14966 (March 21, 2016).
2 Notice of Proposed Rulemaking, 80 FR 26200 (May 7, 2015).
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