On April 30, 2015, the U.S. Commodity Futures Trading Commission (CFTC) issued a Notice of Proposed Rulemaking that would have the effect of reducing reporting and recordkeeping requirements for trade option counterparties that are neither swap dealers nor major swap participants (Non-SD/MSPs), including energy companies, agricultural producers, and other commercial end users.
The proposals are part of an ongoing effort by CFTC Chairman Timothy Massad to reduce regulations on end users that rely on the derivatives market in order to hedge their business risks. The proposed rulemaking, which will be open for public comment for 30 days after publication in the Federal Register, includes the following actions:
- Elimination of Part 45 Reporting for Non-SD/MSPs. Under current CFTC rules, a Non-SD/MSP counterparty to a trade option that has become obligated to report a swap transaction within the past calendar year must comply with the reporting requirements of the CFTC’s Part 45 rules. The CFTC proposal would eliminate that requirement and would provide that a Non-SD/MSP under no circumstances would be subject to Part 45 reporting with respect to its trade option activities.
- Elimination of Form TO Filing Requirement. Currently, a Non-SD/MSP trade option counterparty is required to make an annual filing with the CFTC on Form TO that contains specified information regarding the counterparty and the types and amounts of physical commodities underlying its trade options. The CFTC proposes to delete Form TO and eliminate the requirement to make an annual filing on such form. Instead, the CFTC would require a Non-SD/MSP trade option counterparty to provide a notice by email to the CFTC within 30 days after entering into trade options with an aggregate notional value in excess of $1 billion in any calendar year (or, in the alternative, a notice that it reasonably expects to enter into trade options having such aggregate notional value during the calendar year).
- Modification of Recordkeeping Requirements for Non-SD/MSPs. The CFTC proposal would codify relief from certain swap recordkeeping requirements for a Non-SD/MSP trade option counterparty that was granted by a 2013 no-action letter, provided that the Non-SD/MSP must obtain a legal entity identifier (LEI) and provide such LEI to its counterparty if that counterparty is a SD or MSP.
CFTC Commissioner J. Christopher Giancarlo stated that, while he agreed with the proposal, the agency should go even further and completely exempt trade options from the pending re-proposal of the position limits rules.
CFTC Commissioner Sharon Bowen also mentioned the Commission’s intention to finalize guidance on forward contracts with embedded volumetric optionality and took the extra step of separately proposing an additional exemption to the trade option proposal. Her proposal would exempt a forward contract with volumetric variability that meets the definition of a trade option and provide a test for determining when peaking supply contracts are commodity options.
If you would like to learn more about the CFTC proposal, or you are thinking about submitting written comments on the proposal, please contact a member of Schiff Hardin’s Energy and Public Utilities Practice Group or Financial Markets and Products Practice Group.