CFTC issued an interim final rule proposing to provide a trade option exemption to the Dodd Frank swap regulations. Comments on the interim final rule are due by June 26, 2012.
The trade option exemption is only applicable to offerors, offerees, and option transactions having certain characteristics as follows:
Offeror – either: 1) an Eligible Contract Participant; or 2) a producer, processor, or commercial user of, or a merchant handling the commodity which is the subject of the commodity option transaction, or the products or by-products thereof, and be offering or entering into the transaction solely for purposes related to its business as such.
Offeree - a producer, processor, or commercial user of, or a merchant handling the commodity which is the subject of the commodity option transaction, or the products or byproducts thereof, and be entering into the transaction solely for purposes related to its business as such.
Physical Commodity Option - both parties must intend that the commodity option be physically settled, so that, if exercised, the option would result in the sale of an exempt or agricultural (i.e., nonfinancial) commodity for immediate (spot) or deferred (forward) shipment or delivery.
In order for a transaction to be eligible for the trade option exemption, there are recordkeeping and reporting requirements, subject to certain conditions. In the case of an otherwise unreported transaction, it would be subject to an annual notice filing requirement. These transactions will still be subject to the Commission’s general anti-fraud and anti-manipulation rules.
In connection with the interim final rule’s trade option exemption in § 32.3 adopted herein, the Commission requested comment on the following questions:
“1. Generally, does the interim final rule issued herein provide an appropriate regulatory framework for trade options?
2. Regarding the trade option exemption, will such provision preserve appropriate hedging opportunities for current users of the trade options market? Is there any reason not to retain the trade option exemption as issued herein?
a. What types of entities offer trade options pursuant to the existing trade option exemption? Is the scope of the trade option exemption offeror requirement in the interim final rule (i.e., offerors must be ECPs or commercials) appropriate?
Alternatively, is this offeror requirement either too broad or too narrow?
b. Is the scope of the trade option exemption offeree requirement in the interim final rule (i.e., offerees must be commercials) appropriate?
Alternatively, is this offeree requirement either too broad or too narrow? Should ECPs that are not commercials be permitted as offerees? Why or why not?
c. Is the list of commercials described in the interim final rule (i.e., a producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity option transaction, or the products or byproducts thereof) appropriate?
Alternatively, is this description of commercials either too broad or too narrow?
d. Is the range of commodity option transactions that would qualify for the trade option exemption appropriate?
i. By requiring that a trade option, when exercised, must result in the immediate (spot) or deferred (forward) shipment or delivery of an exempt or agricultural commodity, would the interim final rule improperly exclude other commodity option transactions, including other transactions with optionality, that should be eligible for a trade option exemption?
ii. In the alternative, is this physical delivery requirement of the trade option exemption too broad?
e. Should the interim final rule retain the general exemptive authority at § 32.3(e)?
f. In connection with § 32.3:
i. Is the requirement to comply with the part 45 recordkeeping rules for all trade option participants appropriate?
ii. Is the requirement that certain trade options be reported pursuant to the reporting provisions of part 45 appropriate?
1. Alternatively, should there be a de minimis threshold below which part 45 reporting would not apply to a trade option transaction and its participants (unless they are SDs/MSPs)?
2. If the response to the foregoing question is yes, should the de minimis threshold be based on the underlying transactions (volume, value, or some other measure), the participant characteristics, both, or some other measure? Where practicable, please identify a specific level at which a de minimis threshold may be set.
iii. In § 32.3(b)(1)(i), the Commission provides that trade options reporting for commodity options is required for counterparties that have become obligated to comply with the reporting requirements of part 45. The Commission understands that in some circumstances a counterparty that transacts trade options may not, itself, be obligated to report under part 45, but may be affiliated, at the enterprise or group level, with another entity that complies with part 45. There may be circumstances, therefore, where the obligation to report trade options would be more appropriately based on trade options activity and part 45 reporting at the enterprise or group level.
1. How often do cases occur in which a person that is subject to part 45 receives, in the ordinary course of business, transaction-level trade options information from a trade option counterparty affiliate that is not subject to part 45?
2. Should § 32.3(b)(1) be revised to account for such situations and, if so, how?
iv. Is the requirement that counterparties to unreported trade options submit an annual notice filing, via Form TO, for the purpose of notifying the Commission that such counterparty entered into one or more unreported trade in the prior calendar year appropriate?
1. Alternatively, should these trade options be reported pursuant to part 45, notwithstanding that these counterparties do not otherwise comply with those requirements in connection with their swap trading activities? What would be the costs and benefits of this alternative condition? Please provide data and estimates to support your comments.
2. Should Form TO be required to be submitted more often (e.g., quarterly or monthly) and/or to require additional data fields (e.g., expired and/or open trade options and transaction specific data for each unreported trade option)?
What would be the costs associated with requiring more frequent and/or more detailed filings? Please provide data and estimates to support your comments.
v. Is the swaps large trader reporting condition (part 20) appropriate for the trade option exemption?
vi. Is the position limit condition (part 151) appropriate for the trade option exemption?
vii. Are the SD and MSP recordkeeping, reporting, and risk management conditions, as applied via part 23, appropriate for SDs and MSPs transacting under the trade option exemption?
viii. Is the condition retaining the applicability of CEA section 4s(e) (Capital and Margin Requirements for SDs and MSPs) appropriate?
ix. Are the antifraud, antimanipulation, and enforcement related conditions appropriate for the trade option exemption?
x. Since trade options have to be physically delivered and may only be offered to commercials for use in their business as such, does it makes sense to exclude trade options from the calculation of whether or not a market participant is required to register as an SD or MSP? Alternatively, is there any reason to include trade options in the calculation of whether or not a market participant is required to register as an SD or MSP?
3. Does the interim final rule issued herein omit or fail to appropriately consider any other areas of concern regarding commodity options?
4. The Commission also invites comments on the costs and benefits considerations of the interim final rule under CEA section 15a, below. The Commission specifically requests that commenters quantify the costs and benefits, where practical.”
The full text of the Interim Final Rule is available on the NEM Website.