CFTC Final Rule: Commodity Options
|FINAL RULE: Approved at CFTC Open Meeting, April 18, 2012.|
|Final Rule-Swaps||Effective Date - Swaps||Effective Date-Options|
|August 10, 2011||December 31, 2011||June 26, 2012|
At its April 18, 2012 open meeting, the CFTC approved a final rulemaking that will revise Commission regulations to permit the transaction of commodity options, subject to all rules and regulations applicable to any other swap.
Included in the provisions of the Dodd-Frank Act was a requirement that the CFTC issue rules regarding transacting swaps in an agricultural commodity, as that term is defined by the Commission. Dodd-Frank required the definition to include “options,” other than a few exceptions (e.g., options on a futures contract) under the definition of “swap.” A proposed rule on agricultural commodities and swaps passed in late 2010, and the final rule on agricultural swaps was approved in August 2011. This rule finalizes the commodity options section of the proposed rule.
Summary of the Final Rule
- Exchange-traded options on futures, which are regulated under part 33 of the Commission regulations, are specifically excluded from the swap definition. This rulemaking has no effect on those transactions. The final rule also deletes the "obsolete" agricultural trade option registration provisions from part 3 of the Commission’s regulations.
- The rulemaking also includes an interim final rule that provides a trade option exemption from the general swaps rules, subject to certain conditions, for certain physical delivery commodity options. The conditions include position limits, large trader reporting, appropriate recordkeeping and reporting requirements, antifraud and anti-manipulation rules, and the retention of certain swap requirements for swap dealers and major swap participants that engage in trade options.
The rulemaking applies to commodity options that fall under the definition of "swap". Its effective date was June 26, 2012. The compliance date was October 12, 2012.
Trade Option Exemption
For a transaction to be within the trade option exemption, the option, both the buyer and seller must satisfy certain eligibility requirements, including
- the option, if exercised, be physically settled,
- the option seller meet certain eligibility requirements, and
- the option buyer be a commercial user of the commodity underlying the option.
- reports such transactions pursuant to Form TO and
- notifies the commission if it transacts in excess of $1 billion notional value of trade options in any calendar year.
Form TO is required to be filled out annually by any counterparty to one or more unreported trade in the prior calendar year. The annual filing is due before March 1 of the following year. To view Form TO, CLICK HERE.
Also in the April 2013 no-action letter is relief for those qualifying for the trade option exemption from addition recordkeeping requirements, provided that the entity obtains a Legal Entity Identifier for all transactions with SD/MSPs, and that it notifies the commission if it transacts in excess of $1 billion notional value of trade options in any calendar year.
Staff FAQ, September 2013
On September 30, 2013, the CFTC staff published a "frequently asked questions" sheet consisting of 18 items on topics such as:
- qualifying for an exemption to the trade option requirements;
- reporting and recordkeeping requirements;
- filing of Form TO;
- obtaining a Legal Entity Identifier (LEI); and
- how the rule works with other regulations such as position limits and cross-border activities.
Related Documents: Fact Sheet, Q&A, Federal Register Entry, April 2013 No-action Letter, Staff FAQ September 2013
- CFTC to Hold Open Meeting to Consider Two Final Rules. CFTC. Retrieved on April 18, 2012.
- Final and Interim Final Rulemaking Regarding Commodity Options. CFTC. Retrieved on April 18, 2012.
- CFTC’s Division of Market Oversight Issues No-Action Relief for End-Users from Certain Reporting and Recordkeeping Requirements of the Trade Option Exemption. CFTC. Retrieved on April 9, 2013.