CFTC Proposed Rule: Trade Options

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Timeline, Trade Options, CFTC
Proposed Rule Comment Deadline Final Rule
April 30, 2015 June 22, 2015 TBA

On April 30, 2015, the CFTC issued a proposed rule and request for comment on 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 businesses.<ref>CFTC Approves Proposed Rulemaking to Amend the Trade Option Exemption by Reducing Certain Reporting and Recordkeeping Requirements for End-Users. CFTC. Retrieved on April 30, 2015.</ref>

The rule was approved by unanimous consent in seriatim. The rule appeared in the Federal Register on May 7, 2015, and, the deadline for public comment is June 22, 2015. Comments can be filed and found on the CFTC web site HERE.


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.

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.<ref>Final and Interim Final Rulemaking Regarding Commodity Options. CFTC. Retrieved on April 18, 2012.</ref> 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.

The rulemaking included 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.

Summary of the Proposed Rule[edit]

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.

Reporting Requirements

Under the proposed rule, the annual Form TO annual notice reporting requirement for otherwise unreported trade options. Instead, a Non-SD/MSP would only need to provide notice to the Commission’s Division of Market Oversight (DMO) within 30 days after entering into trade options (whether reported or unreported) that have an aggregate notional value in excess of $1 billion in any calendar year or, in the alternative, a Non-SD/MSP would provide notice by email to DMO that it reasonably expects to enter into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year. Additionally, the Commission proposes that Non-SD/MSPs would under no circumstances be subject to part 45 reporting requirements in connection with their trade options.

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.

Recordkeeping Requirements

Non-SD/MSP would be exempt from swap recordkeeping and reporting requirements, but would need to obtain a Legal Entity Identifier (LEI) and provide such LEI to its SD/MSP counterparty.

Commissioner Statements[edit]

After the approval of the proposed rule, CFTC Commissioner J. Christopher Giancarlo issued a statement in support of the rule in general, but his objection to a statement within the Commission's rule that it "preliminarily believes that any future application of position limits would be best addressed in the context of the pending position limits rulemaking. According to Giancarlo, "trade options, which are commonly used as hedging instruments or in connection with some commercial function, would normally qualify as hedges, exempt from the speculative position limit rules."<ref>Statement of Commissioner J. Christopher Giancarlo Regarding Trade Options Rule. CFTC. Retrieved on April 30, 2015.</ref>

View Commissioner Giancarlo's statement

Additionally, Commissioner Sharon Bowen issued a statement asking commenters on the trade options rule to also weigh in on two other topics of concern:

  • Instruments containing a forward contract with volumetric variability; and
  • Supply contracts for a specified portion of an entity’s physical need for a commodity (e.g., peaking supply contracts).

View Commissioner Bowen's statement

Staff FAQ, September 2013[edit]

On September 30, 2013, the CFTC staff published a "frequently asked questions" sheet consisting of 18 items on topics such as:

Related Document: Federal Register Entry[edit]



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