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CFTC Amends Commercial End-User Trade Option Reporting Exemption
Practical Law Legal Update w-001-6504 (Approx. 4 pages)
CFTC Amends Commercial End-User Trade Option Reporting Exemption
by Practical Law Finance
| Published on 23 Mar 2016 • USA (National/Federal) |
The CFTC has approved a final rule that amends the reporting and recordkeeping exemption, known as the trade option exemption, for trade option counterparties that are not swap dealers or major swap participants.
On March 16, 2016, the CFTC approved a final rule that amends the reporting and recordkeeping exemption, known as the trade option exemption, for trade option counterparties that are not swap dealers (SDs) or major swap participants (MSPs). The effective date of these amendments is March 21, 2016.
The trade option exemption was originally issued in response to market criticism in April 2012 in the form of an interim final rule, which became effective on June 26, 2012, and is reflected in CFTC Regulation 32.3 (17 CFR § 32.3) (see Legal Update, Final Rules on Commodity Options under Dodd-Frank Issued by CFTC). CFTC Regulation 32.3 provides an exemption for non-SD/MSP trade option counterparties from Section 32.2(a) of the Commodity Exchange Act (CEA), which requires commodity trade options to be conducted in compliance with any CFTC rule or regulations that is applicable to swaps (17 CFR § 32.2), including certain reporting and recordkeeping obligations.
The final rule simplifies the trade option exemption by:
- Eliminating the Form TO and any Part 45 reporting requirements under CFTC Regulation 32.3(b) for non-SD/MSP end users of trade options (since the Form TO requirement has been eliminated, the CFTC took care to note that counterparties that are non-SDs/MSPs are not require to report their otherwise unreported trade options for calendar year 2015).
- Eliminating swap-related recordkeeping requirements in connection with the trade option for non-SD/MSP trade option counterparties, so long as the non-SD/MSP that enters into a trade option with an SD or MSP obtains a legal entity identifier (LEI) and provides it to the SD/MSP counterparty.
- Amending CFTC Regulation 32.3(c) to eliminate the reference to the vacated Part 151 position limit requirements.
- Withdrawing the relief found in No-Action Letter 13-08, which provided conditional relief for non-SDs/MSP trade option counterparties, since the final rule releases them from swap-related reporting or recordkeeping obligations (other than obtaining and providing an LEI to their SD/MSP counterparties).
Note that the final rule omitted the requirement included in the May 7, 2015 proposal (see Legal Update, CFTC Proposes End-user Exemption from Trade Option Reporting) that would have required a non-SD/MSP trade option counterparty to provide notice by email to the CFTC within 30 days of entering into the trade option (regardless if reported or not) so long as the aggregated notional value of the transaction exceeded $1 billion.
The trade option exemption applies to any commodity option purchased by a commercial non-SD/MSP party that, upon exercise, resulted in the sale of a physical commodity for immediate or deferred shipment or delivery, so long as:
- The offeror is an eligible contract participant (ECP) or a party that is the subject of a commodity option transaction (a producer, processor or commercial user of the commodity).
- The offeree is, and the offeror reasonably believes the offeree to be, a commercial party who entered into the transaction for business purposes.
- The option is intended to be physically settled.
- The transaction adheres to the requirements found in 17 CFR 32.3(b)-(d), which include:
- any applicable data reporting requirements under Part 45 of the CFTC's regulations; or, for unreported trade options, annual submission of Form TO.
- large-trader reporting requirements under Part 20 of the CFTC's regulations (see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules: Large-trader Position Data Reporting for Physical Commodity Swaps).
- position limits regulations under Part 151 of the CFTC's regulations (note that these rules were vacated and are not currently in effect; see Practice Note, The Dodd-Frank Act: Commodity Position Limits).
- recordkeeping, reporting, and risk-management requirements under subparts F and J of Part 23 of the CFTC's regulations, which include 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 ).
- capital and margin requirements under CEA section 4s(e) (see Practice Note, The Dodd-Frank Act: Derivatives Margin Collateral Rules).
- Any applicable CFTC antifraud or anti-manipulation provisions (see Practice Note, Summary of Dodd-Frank Act: Swaps and Derivatives: Swap Antifraud Rules).
Note that the rule applies to non-SD/MSP trade option counterparties regardless of whether or not the counterparty to the transaction is an SD or MSP.