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CFTC Proposes End-user Exemption from Trade Option Reporting
Practical Law Legal Update 2-611-4787 (Approx. 4 pages)
CFTC Proposes End-user Exemption from Trade Option Reporting
by Practical Law Finance
| Published on 04 May 2015 • USA (National/Federal) |
The CFTC has proposed a rule that would reduce reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers nor major swap participants, including commercial end users that transact in trade options in connection with their business.
On April 30, 2015, the CFTC proposed a rule that would reduce reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers (SDs) nor major swap participants (MSPs) (non-SD/MSPs), including commercial end users that transact in trade options in connection with their business. A trade option is generally a commodity option purchased by a commercial party that, upon exercise, results in the sale of a physical commodity for immediate or deferred shipment or delivery (CFTC regulation 32.3(a) (17 C.F.R. 32.3(a))).
Trade options, while exempt from most Dodd-Frank rules applicable to swaps, are subject to CFTC Regulations 32.3(b)-(d), which require, among other things, compliance with the following regulations, to the extent that these sections would apply to a swap:
- Large-trader reporting requirements (see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules: Large-trader Position Data Reporting for Physical Commodity Swaps).
- Speculative commodity position limits (see Practice Note, The Dodd-Frank Act: Commodity Position Limits).
- Duties of SDs and MSPs included in subpart J of CFTC Regulations Part 23 (17 C.F.R. 23), which includes regulations that address monitoring position limits, diligent supervision, business continuity and disaster recovery, conflicts of interest policies and procedures and general information regarding the availability of records for disclosure and inspection (see Legal Update, CFTC Clarifies Most Commodity Options Are Swaps Subject to Dodd-Frank).
- Recordkeeping for trade options if the counterparty is an SD or MSP (see Legal Update, CFTC Clarifies Most Commodity Options Are Swaps Subject to Dodd-Frank).
- CFTC recordkeeping requirements explicitly contained in CFTC Regulation 45.2 (17 C.F.R. 45.2), which require, among other things, the retention of full, complete and systematic records on each transaction as well as compliance with general recordkeeping requirements, which govern, among other things, the maintenance of records and their availability (see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules: Final "SDR" Data Reporting Rules).
- Capital and margin requirements applicable to SDs and MSPs (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules).
- Prohibitions on manipulation, fraud and abusive practices applicable to swaps specifically, as well as the antifraud and enforcement provisions of the CEA (see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Antifraud Rules).
The CFTC's proposal would:
- Eliminate the Form TO annual notice reporting requirement for otherwise unreported trade options found in CFTC Regulation 32.3(b) (17 C.F.R. 32.3(b)) (see Legal Update, CFTC Clarifies Most Commodity Options Are Swaps Subject to Dodd-Frank). Instead, a non-SD/MSP would only need to provide notice, by email, to the CFTC's Division of Market Oversight (DMO) either:
- Within 30 days after entering into trade options (whether reported or unreported) in an aggregate notional amount of more than $1 billion during any calendar year.
- That it reasonably expects to enter into trade options (whether reported or unreported) in an aggregate notional amount of more than $1 billion during any calendar year.
- Amend CFTC Regulation 32.3(b) (17 C.F.R. 32.3(b)) so that non-SD/MSPs would under no circumstances be subject to Part 45 ("SDR") swap data reporting requirements in connection with their trade options.
- Amend CFTC Regulation 32.3(c) (17 C.F.R. 32.3(c)) to eliminate the reference to the now-vacated Part 151 position limits requirements (see Practice Note, The Dodd-Frank Act: Commodity Position Limits).
The CFTC is requesting public comment on all aspects of the proposed rule. The proposed rule has been published in the Federal Register, and comments are due on June 8, 2015. Comments submitted by mail should be addressed to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three LaFayette Centre, 1155 21st Street, NW, Washington, DC 20581. Online submission can be made on the CFTC website (http://comments.cftc.gov) or on the Federal eRulemaking Portal (http://www.regulations.gov). All submissions should be identified by RIN 3038-AE26.