2016-06260
Federal Register Volume 81, Number 54 (Monday, March 21, 2016)]
[Rules and Regulations]
[Pages 14966-14975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06260]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 32
RIN 3038-AE26
Trade Options
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or the ``CFTC'') is issuing a final rule to amend the limited trade
options exemption in the Commission's regulations, as described herein,
with respect to the following subject areas: Reporting requirements for
trade option counterparties that are not swap dealers or major swap
participants; recordkeeping requirements for trade option
counterparties that are not swap dealers or major swap participants;
and certain non-substantive amendments.
DATES: Effective date: The effective date for this final rule is March
21, 2016.
FOR FURTHER INFORMATION CONTACT: David N. Pepper, Special Counsel,
Division of Market Oversight, at (202) 418-5565 or [email protected]; or
Mark Fajfar, Assistant General Counsel, Office of the General Counsel,
at (202) 418-6636 or [email protected], Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street NW., Washington,
DC 20581.
SUPPLEMENTARY INFORMATION:
I. Introduction
A. Background
In April 2012, pursuant to section 4c(b) of the Commodity Exchange
Act (the ``CEA'' or the ``Act''),\1\ the Commission issued a final rule
to repeal and replace part 32 of its regulations concerning commodity
options.\2\ The Commission undertook this effort to address section 721
of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act
(the ``Dodd-Frank Act'' or ``Dodd-Frank''),\3\ which, among other
things, amended the CEA to define the term ``swap'' to include
commodity options.\4\ Notably, Sec. 32.2(a) provides the
[[Page 14967]]
general rule that commodity option transactions must be conducted in
compliance with any Commission rule, regulation, or order otherwise
applicable to any other swap.\5\
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\1\ 7 U.S.C. 6c(b) (providing that no person shall offer to
enter into, enter into or confirm the execution of, any transaction
involving any commodity regulated under this chapter which is of the
character of, or is commonly known to the trade as an ``option''
contrary to any rule, regulation, or order of the Commission
prohibiting any such transaction or allowing any such transaction
under such terms and conditions as the Commission shall prescribe).
\2\ See Commodity Options, 77 FR 25320 (Apr. 27, 2012)
(``Commodity Options Release''). The Commission also issued certain
conforming amendments to parts 3 and 33 of its regulations. See id.
The Commission's regulations are set forth in chapter I of title 17
of the Code of Federal Regulations.
\3\ Public Law 111-203, 124 Stat. 1376 (2010).
\4\ See 7 U.S.C. 1a(47)(A)(i) (defining ``swap'' to include an
option of any kind that is for the purchase or sale, or based on the
value, of 1 or more commodities''); 7 U.S.C. 1a(47)(B)(i) (excluding
options on futures from the definition of ``swap''); 7 U.S.C. 1a(36)
(defining an ``option'' as an agreement, contract, or transaction
that is of the character of, or is commonly known to the trade as,
an ``option''). The Commission defines ``commodity option'' or
``commodity option transaction'' as any transaction or agreement in
interstate commerce which is or is held out to be of the character
of, or is commonly known to the trade as, an ``option,''
``privilege,'' ``indemnity,'' ``bid,'' ``offer,'' ``call,'' ``put,''
``advance guaranty'' or ``decline guaranty'' and which is subject to
regulation under the Act and Commission regulations. See 17 CFR
1.3(hh).
\5\ See 17 CFR 32.2.
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In response to requests from commenters, the Commission added a
limited exception to this general rule for physically delivered
commodity options purchased by commercial users of the commodities
underlying the options (the ``trade option exemption'').\6\ Adopted as
an interim final rule, Sec. 32.3 provides that qualifying commodity
options are generally exempt from the swap requirements of the CEA and
the Commission's regulations, subject to certain specified conditions.
To qualify for the trade option exemption, a commodity option
transaction must meet the following requirements: (1) The offeror is
either an eligible contract participant (``ECP'') \7\ or a producer,
processor, commercial user of, or merchant handling the commodity that
is the subject of the commodity option transaction, or the products or
byproducts thereof (a ``commercial party'') that offers or enters into
the commodity option transaction solely for purposes related to its
business as such; (2) the offeree is, and the offeror reasonably
believes the offeree to be, a commercial party that is offered or
enters into the transaction solely for purposes related to its business
as such; and (3) the option is intended to be physically settled so
that, if exercised, the option would result in the sale of an exempt or
agricultural commodity \8\ for immediate or deferred shipment or
delivery.\9\
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\6\ See 77 FR at 25326-29. See also 17 CFR 32.2(b), 32.3. The
interim final rule continued the Commission's long history of
providing special treatment to ``trade options'' dating back to the
Commission's original trade option exemption in 1976. See Regulation
and Fraud in Connection with Commodity and Commodity Option
Transactions, 41 FR 5108 (Nov. 18, 1976).
\7\ See 7 U.S.C. 1a(18) (defining ``eligible contract
participant''); 17 CFR 1.3(m) (further defining ``eligible contract
participant'').
\8\ See 7 U.S.C. 1a(20) (defining ``exempt commodity'' to mean a
commodity that is not an agricultural commodity or an ``excluded
commodity,'' as defined in 7 U.S.C. 1a(19)); 17 CFR 1.3(zz)
(defining ``agricultural commodity''). Examples of exempt
commodities include energy commodities and metals.
\9\ See 17 CFR 32.3(a).
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Commodity option transactions that meet these requirements are
generally exempt from the provisions of the Act and any Commission
rule, regulation, or order promulgated or issued thereunder, otherwise
applicable to any other swap, except for the requirements enumerated in
Sec. 32.3(b)-(d).\10\ These requirements include: Recordkeeping and
reporting requirements; \11\ large trader reporting requirements in
part 20; \12\ position limits under part 151; \13\ certain
recordkeeping, reporting, and risk management duties applicable to swap
dealers (``SDs'') and major swap participants (``MSPs'') in subparts F
and J of part 23; \14\ capital and margin requirements for SDs and MSPs
under CEA section 4s(e); \15\ and any applicable antifraud and anti-
manipulation provisions.\16\
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\10\ See 17 CFR 32.3(a), (b)-(d).
\11\ See 17 CFR 32.3(b).
\12\ See 17 CFR 32.3(c)(1). Applying Sec. 32.3(c)(1), reporting
entities as defined in part 20--swap dealers and clearing members--
must consider their counterparty's trade option positions just as
they would consider any other swap position for the purpose of
determining whether a particular counterparty has a consolidated
account with a reportable position. See 17 CFR 20.1. A trade option
counterparty would not be responsible for filing large trader
reports unless it qualifies as a ``reporting entity,'' as that term
is defined in Sec. 20.1.
\13\ See 17 CFR 32.3(c)(2). See also Int'l Swaps & Derivatives
Ass'n v. U.S. Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259,
270 (D.D.C. 2012), vacating the part 151 rulemaking, Position Limits
for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011).
\14\ See 17 CFR 32.3(c)(3)-(4). Note that Sec. 32.3(c)(4)
explicitly incorporates Sec. Sec. 23.201 and 23.204, which require
counterparties that are SD/MSPs to comply with part 45 recordkeeping
and reporting requirements, respectively, in connection with all
their swaps activities (including all their trade option
activities). See 17 CFR 23.201(c), 23.204(a).
\15\ See 17 CFR 32.3(c)(5).
\16\ See 17 CFR 32.3(d). Note that Sec. 32.2 also preserves the
continued application of Sec. 32.4, which specifically prohibits
fraud in connection with commodity option transactions, to commodity
options subject to the trade option exemption. See 17 CFR 32.2,
32.4.
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In adopting Sec. 32.3,\17\ the Commission stated that the trade
option exemption is generally intended to permit parties to hedge or
otherwise enter into commodity option transactions for commercial
purposes without being subject to the full Dodd-Frank swaps regime.\18\
This limited exemption continued the Commission's longstanding practice
of providing commercial participants in trade options with relief from
certain requirements that would otherwise apply to commodity
options.\19\ The Commission further explained that the applicable
conditions in Sec. 32.3(b)-(d) were primarily intended to preserve a
level of visibility into the market for trade options while still
reducing the regulatory compliance burden for trade option
participants.\20\
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\17\ In the year following the Commission's adoption of the
trade option exemption, the Commission's Division of Market
Oversight (``DMO'') issued a series of no-action letters granting
relief from certain conditions in the trade option exemption. See
CFTC No-Action Letter No. 12-06 (Aug. 14, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-06.pdf; CFTC No-Action Letter No. 12-41 (Dec. 5, 2012), available
at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-41.pdf; CFTC No-Action Letter No. 13-08 (Apr. 5, 2013),
available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf. CFTC No-Action Letter No. 13-08 (``No-
Action Letter 13-08'') provides that DMO would not recommend that
the Commission commence an enforcement action against a market
participant that is a Non-SD/MSP for failing to comply with the part
45 reporting requirements, as required by Sec. 32.3(b)(1), provided
that such Non-SD/MSP meets certain conditions, including reporting
such exempt commodity option transactions via Form TO and notifying
DMO no later than 30 days after entering into trade options having
an aggregate notional value in excess of $1 billion during any
calendar year. No-Action Letter 13-08 at 3-4. No-Action Letter 13-08
also grants relief from certain swap recordkeeping requirements in
part 45 for a Non-SD/MSP that complies with the recordkeeping
requirements set forth in Sec. 45.2, provided that if the
counterparty to the trade option at issue is an SD or an MSP, the
Non-SD/MSP obtains a legal entity identifier (``LEI'') pursuant to
Sec. 45.6. Id. at 4-5. DMO will withdraw the no-action relief
provided pursuant to No-Action Letter 13-08 upon the effective date
of this final rule.
\18\ See 77 FR at 25326, n.39. The limited trade option
exemption in Sec. 32.3 operates as a general exemption from the
rules otherwise applicable to swaps, subject to the conditions
enumerated in Sec. 32.3. For example, trade options do not factor
into the determination of whether a market participant is an SD or
MSP; trade options are exempt from the rules on mandatory clearing;
and trade options are exempt from the rules related to real-time
reporting of swaps transactions. The provisions identified in this
list are not intended to constitute an exclusive or exhaustive list
of the swaps requirements from which trade options are exempt.
\19\ See Regulation and Fraud in Connection with Commodity and
Commodity Option Transactions, 41 FR 51808 (Nov. 24, 1976) (adopting
an exemption from the general requirement that commodity options be
traded on-exchange for commodity option transaction for certain
transactions involving commercial parties); Suspension of the Offer
and Sale of Commodity Options, 43 FR 16153, 16155 (Apr. 17, 1978)
(adopting a rule suspending all trading in commodity options other
than such exempt trade options); Trade Options on the Enumerated
Agricultural Commodities, 63 FR 18821 (Apr. 16, 1998) (authorizing
the off-exchange trading of trade options in agricultural
commodities).
\20\ See 77 FR at 25326-27.
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B. Existing Reporting Requirements for Trade Option Counterparties That
Are Non-SD/MSPs
Pursuant to Sec. 32.3(b)(1), the determination as to whether a
trade option must be reported pursuant to part 45 is based on the
status of the parties to the trade option and whether or not they have
previously reported swaps to an appropriate swap data repository
(``SDR'') pursuant to part 45.\21\ If a trade option involves at least
one counterparty (whether as buyer or seller) that has (1) become
obligated to comply with the reporting requirements of part 45, (2) as
a reporting party, (3) during the twelve month period
[[Page 14968]]
preceding the date on which the trade option is entered into, (4) in
connection with any non-trade option swap trading activity, then such
trade option must also be reported pursuant to the reporting
requirements of part 45. If only one counterparty to a trade option has
previously complied with the part 45 reporting provisions, as described
above, then that counterparty shall be the part 45 reporting
counterparty for the trade option. If both counterparties have
previously complied with the part 45 reporting provisions, as described
above, then the part 45 rules for determining the reporting
counterparty will apply.\22\
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\21\ See 17 CFR 32.3(b)(1).
\22\ See 17 CFR 45.8.
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To the extent that neither counterparty to a trade option has
previously submitted reports to an SDR as a result of its swap trading
activities as described above, then such trade option is not required
to be reported pursuant to part 45. Instead, Sec. 32.3(b)(2) requires
that each counterparty to an otherwise unreported trade option (i.e., a
trade option that is not required to be reported to an SDR by either
counterparty pursuant to Sec. 32.3(b)(1) and part 45) completes and
submits to the Commission an annual Form TO filing providing notice
that the counterparty has entered into one or more unreported trade
options during the prior calendar year.\23\ Form TO requires an
unreported trade option counterparty to: (1) Provide its name and
contact information; (2) identify the categories of commodities
(agricultural, metals, energy, or other) underlying one or more
unreported trade options which it entered into during the prior
calendar year; and (3) for each commodity category, identify the
approximate aggregate value of the underlying physical commodities that
it either delivered or received in connection with the exercise of
unreported trade options during the prior calendar year. Counterparties
to otherwise unreported trade options must submit a Form TO filing by
March 1 following the end of any calendar year during which they
entered into one or more unreported trade options.\24\ In adopting
Sec. 32.3, the Commission stated that Form TO was intended to provide
the Commission with a level of visibility into the market for
unreported trade options that is ``minimally intrusive,'' thereby
allowing it to identify market participants from whom it should collect
additional information, or whom it should subject to additional
reporting obligations in the future.\25\
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\23\ Form TO is set out in appendix A to part 32 of the
Commission's regulations.
\24\ In 2014, approximately 330 Non-SD/MSPs submitted Form TO
filings to the Commission, approximately 200 of which indicated
delivering or receiving less than $10 million worth of physical
commodities in connection with exercising unreported trade options
in 2013, which was the first year in which Sec. 32.3 and Form TO
reporting became effective. In 2015, approximately 349 Non-SD/MSPs
submitted Form TO filings to the Commission, approximately 150 of
which indicated delivering or receiving less than $10 million worth
of physical commodities.
\25\ See 77 FR at 25327-28.
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C. Existing Recordkeeping Requirements for Trade Option Counterparties
That Are Non-SD/MSPs
Commission regulation Sec. 32.3(b) provides that in connection
with any commodity option transaction that is eligible for the trade
option exemption, every counterparty shall comply with the swap data
recordkeeping requirements of part 45, as otherwise applicable to any
swap transaction.\26\ In discussing the trade option exemption
conditions, however, the Commission noted in the preamble to the
Commodity Options Release that ``[t]hese conditions include a
recordkeeping requirement for any trade option activity, i.e., the
recordkeeping requirements of 17 CFR 45.2,'' and did not reference or
discuss any other provision of part 45 that contains recordkeeping
requirements.\27\
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\26\ See 17 CFR 32.3(b).
\27\ See 77 FR at 25327.
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Pursuant to Commission regulation Sec. 45.2, records must be
maintained by all trade option participants and made available to the
Commission as specified therein.\28\ Notably, Sec. 45.2 applies
different recordkeeping requirements, depending on the nature of the
counterparty. For example, if a trade option counterparty is an SD or
MSP, it would be subject to the recordkeeping provisions of Sec.
45.2(a). If a counterparty is a Non-SD/MSP, it would be subject to the
less stringent recordkeeping requirements of Sec. 45.2(b).\29\
Additional recordkeeping requirements in part 45, separate and apart
from those specified in Sec. 45.2 and which would apply to all trade
option counterparties by operation of Sec. 32.3(b) include:
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\28\ 17 CFR 32.3(b), 45.2.
\29\ In the case of Non-SD/MSPs, the primary recordkeeping
requirements are set out in Sec. 45.2(b), which requires Non-SD/
MSPs to keep ``full, complete and systematic records, together with
all pertinent data and memoranda, with respect to each swap in which
they are a counterparty.'' Non-SD/MSPs are also subject to the other
general recordkeeping requirements of Sec. 45.2, such as the
requirement that records must be maintained for 5 years following
the final termination of the swap and must be retrievable within 5
days. See 17 CFR 45.2(c).
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Each swap must be identified in all recordkeeping by the
use of a unique swap identifier (``USI''); \30\
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\30\ 17 CFR 45.5.
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Each counterparty to any swap must be identified in all
recordkeeping by means of a single LEI; \31\ and
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\31\ Each counterparty to any swap subject to the Commission's
jurisdiction must be identified in all recordkeeping and all swap
data reporting pursuant to part 45 by means of a single LEI as
specified in Sec. 45.6. See 17 CFR 45.6.
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Each swap must be identified in all recordkeeping by means
of a unique product identifier (``UPI'') and product classification
system.\32\
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\32\ 17 CFR 45.7.
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D. Trade Options Notice of Proposed Rulemaking
On May 7, 2015, the Commission published in the Federal Register a
notice of proposed rulemaking that included several proposed amendments
to the limited exemption for trade options in Commission regulation
Sec. 32.3 (``the Proposal'').\33\ The Commission proposed
modifications to the recordkeeping and reporting requirements in
existing Sec. 32.3(b) that are applicable to trade option
counterparties that are Non-SD/MSPs. The Commission also proposed a
non-substantive amendment to existing Sec. 32.3(c) to eliminate the
reference to the now-vacated part 151 position limits requirements.
These proposed amendments were generally intended to relax reporting
and recordkeeping requirements where two commercial parties enter into
trade options with each other in connection with their respective
businesses while maintaining regulatory insight into the market for
unreported trade options.
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\33\ Trade Options, Notice of Proposed Rulemaking, 80 FR 26200
(May 7, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2015-11020a.pdf.
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The Commission requested comment on all aspects of the
Proposal.\34\ In response, the Commission received nine comment
letters.\35\ Some of these
[[Page 14969]]
comment letters raised issues concerning the treatment of trade
options, and, more generally, commodity options, in relation to the
swap definition.\36\ However, in the Proposal, the Commission did not
address the general treatment of commodity options, including trade
options, in relation to the swap definition, nor did the Commission
solicit comments on such definitional issues. Rather, as discussed
above, the Proposal contained only specific proposed modifications to
the recordkeeping and reporting requirements in Sec. 32.3(b) that are
applicable to trade option counterparties that are Non-SD/MSPs, as well
as a proposed non-substantive amendment to Sec. 32.3(c). Since issues
concerning the treatment of commodity options in relation to the swap
definition fall outside the scope of the Proposal, the Commission
declines to address such definitional issues in this final rule.
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\34\ See 80 FR at 26202. Initially, comments on the Proposal
were due on or before June 8, 2015. Then, on June 2, 2015, the
Commission extended the comment period for the Proposal through June
22, 2015, in light of the Commission's then recently-published
interpretation concerning forward contracts with embedded volumetric
optionality. See Forward Contracts with Embedded Volumetric
Optionality, 80 FR 28239 (May 18, 2015).
\35\ All comment letters are available through the Commission's
Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1580. Comments addressing the Trade Options NPRM
were received from the following parties: The American Gas
Association (``AGA''); The American Public Gas Association
(``APGA''); The American Public Power Association, Edison Electric
Institute, Electric Power Supply Association, Large Public Power
Council, National Rural Electric Cooperative Association (``Electric
Associations''); The Coalition of Physical Energy Companies
(``COPE''); Cogen Technologies Linden Venture, L.P. (``Linden'');
The Commercial Energy Working Group (``CEWG''); The International
Energy Credit Association (``IECA''); The Natural Gas Supply
Association (``NGSA''); and Southern Company Services Inc. on behalf
of and as agent for Alabama Power Co., Georgia Power Co., Gulf Power
Co., Mississippi Power Co., and Southern Power Co. (``Southern'').
\36\ See, e.g., IECA at 8-13; Linden at 2-8; Electric
Associations at 6-10; AGA at 2-5; and Southern at 6-8.
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The following section will address the comments received on
specific aspects of the Proposal in connection with explaining each of
the amended regulations adopted herein.
II. Discussion of Revised Regulations
A. Revised Reporting Requirements for Trade Option Counterparties That
Are Non-SD/MSPs
1. Elimination of Part 45 Reporting Requirements for Trade Option
Counterparties That Are Non-SD/MSPs
The Commission proposed to amend Sec. 32.3(b) such that a Non-SD/
MSP will under no circumstances be subject to part 45 reporting
requirements with respect to its trade option activities.\37\ The
Commission explained in the Proposal that this proposed amendment was
intended to reduce reporting burdens for Non-SD/MSP trade option
counterparties, many of whom face technical and logistical impediments
that prevent timely compliance with part 45 reporting requirements.\38\
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\37\ See 80 FR at 26203. Note that trade option counterparties
that are SD/MSPs would continue to comply with the swap data
reporting requirements of part 45, including where the counterparty
is a Non-SD/MSP, as they would in connection with any other swap
transaction. See 17 CFR 32.3(c)(4) [renumbered 32.3(c)(3)], 23.201
and 23.204.
\38\ Id.
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NGSA, IECA, and APGA each supported deletion of part 45 reporting
requirements for trade option counterparties that are Non-SD/MSPs.\39\
No commenter opposed deletion.
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\39\ See NGSA at 1 (``The elimination of Part 45 reporting . . .
for [Non-SD/MSP] counterparties to trade options will eliminate
costs that stem from those reporting efforts, and this is a welcome
change in reporting requirements.''); see also IECA at 2; APGA at 2.
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The Commission recognizes that many parties who are not SDs or MSPs
and do not engage in significant swap activity apart from trade options
do not have the infrastructure in place to support part 45 reporting to
an SDR and that instituting such infrastructure would be costly,
particularly for small end users. Therefore, the Commission believes
that these parties, who apart from their trade option activities would
have very limited reporting obligations under part 45, should not be
required to comply with part 45 reporting requirements solely on the
basis of having had to report a minimal number of historical or inter-
affiliate swaps during the same twelve-month period.
Accordingly, for the reasons set forth above and in the Proposal,
the Commission is adopting amended regulation Sec. 32.3(b), as
proposed, by eliminating part 45 reporting requirements for trade
option counterparties that are Non-SD/MSPs.
2. Elimination of the Form TO Notice Filing Requirement
The Commission proposed to amend Commission regulation Sec.
32.3(b) such that a Non-SD/MSP would not be required to report
otherwise unreported trade options on Form TO.\40\ The Commission
further proposed to delete Form TO from appendix A to part 32. The
Commission explained in the Proposal that these proposed amendments
were intended to reduce reporting burdens for Non-SD/MSP trade option
counterparties, many of whom face significant costs in preparing Form
TO.\41\
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\40\ See 80 FR at 26203.
\41\ Id.
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AGA, Electric Associations, CEWG, APGA and NGSA each supported
deletion of the Form TO reporting requirement.\42\ No commenter opposed
deletion of Form TO. AGA commented that the proposed elimination of
Form TO could ``reduce a significant compliance cost and obviate the
need for small end-users to track and report their trade options
activity for a given calendar year.'' \43\ Electric Associations
commented that ``Form TO imposes substantial costs on end-users for
personnel, legal advice and infrastructure,'' and completing Form TO
requires an end-user to ``continuously track the commodity trade
options it enters into, identify which of the commodity trade options
have and have not been reported, and track the commodity trade options
exercised. . . .'' \44\ CEWG commented that ``elimination of the
obligation to file Form TO will allow [Non-SD/MSP trade option
counterparties] to (i) reduce the amount of resources dedicated to
identifying and tracking their trade options and (ii) reallocate
resources for optimal utilization.'' \45\ COPE commented that filing
the actual Form TO is not burdensome, but rather it is the underlying
tracking that is burdensome.\46\
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\42\ See, e.g., AGA at 2, 8; Electric Associations at 1, 5; CEWG
at 2; APGA at 2; NGSA at 1.
\43\ AGA at 8.
\44\ See Electric Associations at 5.
\45\ CEWG at 2.
\46\ See COPE at 2.
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The Commission recognizes that completing Form TO imposes costs and
burdens on Non-SD/MSPs who enter into trade options, especially small
end users. The Commission notes that Form TO data, which is submitted
annually, consists of approximated aggregate values of otherwise
unreported trade options exercised within three broad ranges, and
within four ``commodity categories.'' \47\ The Commission believes
that, in view of the relatively limited surveillance and regulatory
oversight benefits to be derived by the Commission from Form TO data,
which is approximated, aggregated and undifferentiated, completion and
submission of Form TO should no longer be required.
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\47\ Form TO requires Non-SD/MSP trade option counterparties to
report the approximate size of unreported trade options exercised in
the prior calendar year within three dollar-value ranges: Less than
$10 million, between $10 million and $100 million, and over $100
million. Form TO also requires Non-SD/MSP trade option
counterparties to indicate the ``commodity category'' in which they
entered into one or more unreported trade options: Agricultural,
metals, energy or ``other.'' See appendix A to part 32 of the
Commission's regulations.
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Accordingly, for the reasons set forth above, the Commission is
amending regulation Sec. 32.3(b), as proposed, by deleting the Form TO
reporting requirement in connection with otherwise unreported trade
options. Additionally, as proposed, the Commission is deleting appendix
A to part 32, which contains Form TO.
3. The Proposed $1 Billion Notice and Alternative Notice Provisions
Have Not Been Adopted
The Commission proposed to further amend Sec. 32.3(b) by adding a
new requirement that Non-SD/MSP trade
[[Page 14970]]
option counterparties provide notice by email to 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 (the ``$1 Billion Notice'').\48\ The Commission further
proposed that, as an alternative to filing the $1 Billion Notice, a
Non-SD/MSP could 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 (the ``Alternative Notice'').\49\ Collectively, the $1
Billion Notice and the Alternative Notice were referred to in the
proposal as the ``Notice Requirement.'' \50\ The Commission explained
in the Proposal that in light of the other proposed amendments that
would generally remove reporting requirements for Non-SD/MSP
counterparties to trade options, the proposed Notice Requirement would
provide the Commission insight into the size of the market for
unreported trade options and the identities of the most significant
market participants, and would help guide the Commission's efforts to
collect additional information through its authority to obtain copies
of books or records should market circumstances dictate.\51\
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\48\ See 80 FR at 26203-04. As discussed above, the no-action
relief provided by No-Action Letter 13-08 to Non-SD/MSP trade option
counterparties from part 45 reporting requirements is also
conditioned on the Non-SD/MSP providing DMO with a $1 Billion
Notice. See note 17 and accompanying text, supra. In 2013, 2014 and
2015, DMO received $1 Billion Notices from nine, sixteen and fifteen
Non-SD/MSPs, respectively. Most of these $1 Billion Notices were
filed on behalf of large, well known energy companies.
\49\ See 80 FR at 26203-04. The Commission proposed that Non-SD/
MSPs who provide the Alternative Notice would not be required to
demonstrate that they actually entered into trade options with an
aggregate notional value of $1 billion or more in the applicable
calendar year.
\50\ 80 FR at 26203.
\51\ See 80 FR at 26203-04.
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Electric Associations, COPE and Southern each recommended against
adoption of the proposed Notice Requirement.\52\ Electric Associations
commented that it would be burdensome for Non-SD/MSPs to track and
value trade options ``in a manner different than their ordinary
tracking, measuring and recordkeeping for other cash commodity
transactions (intended to be physically settled),'' and that such
burden would be greater for smaller entities, which would need to track
and value their trade options throughout the year, than it would be for
large Non-SD/MSP counterparties, which could merely send the proposed
Alternative Notice email to the Commission in January of each year.\53\
Southern commented that elimination of the Form TO reporting
requirement would not be as meaningful if the Commission adopts the
proposed $1 Billion Notice, because a Non-SD/MSP would nevertheless be
required ``to classify, value and track their trade options'' all
towards compliance with the Notice Requirement.\54\
---------------------------------------------------------------------------
\52\ See Electric Associations at 4-6; Cope at 3; Southern at 2-
3.
\53\ See Electric Associations at 5-6.
\54\ See Southern at 2-3.
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AGA generally supported the Notice Requirement reporting framework,
but commented that it is especially difficult to value many common
types of trade options, such as long-term trade options and trade
options with open-ended price or quantity terms, towards compliance
with the proposed $1 Billion Notice.\55\
---------------------------------------------------------------------------
\55\ See AGA at 5-8.
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The Commission recognizes that the relief provided by eliminating
Form TO and part 45 reporting for trade option counterparties that are
Non-SD/MSPs would be more meaningful if Non-SD/MSP trade option
counterparties are not required to classify, value and track their
trade options for the exclusive purpose of complying with the proposed
Notice Requirement. The Commission also recognizes that commenters have
expressed that trade options, especially trade options that have a long
duration or open price or quantity terms, may be difficult to value.
Thus, the burdens on Non-SD/MSP trade option counterparties to
classify, value and track their trade options towards compliance with
the proposed Notice Requirement could be significant, and it is not
evident that there are any steps these counterparties could take to
more accurately classify, value and track their trade options, given
the uncertainties inherent in this type of contract. Therefore, in view
of the relatively limited use of such data (which would be submitted in
aggregate form and not categorized by commodity or by instrumentation)
for surveillance and regulatory oversight purposes, the Commission does
not believe that the proposed Notice Requirement is necessary.
Accordingly, for the reasons set forth above, the Commission has
chosen not to adopt as part of this final rule the proposed Notice
Requirement, i.e., the proposed $1 Billion Notice and Alternative
Notice requirements.
B. Revised Recordkeeping Requirements for Trade Option Counterparties
That Are Non-SD/MSPs
The Commission proposed to amend Sec. 32.3(b) to clarify that
trade option counterparties that are Non-SD/MSPs need not identify
their trade options in all recordkeeping by means of either a USI or
UPI, as required by Sec. Sec. 45.5 and 45.7.\56\ Rather, with respect
to part 45 recordkeeping requirements, the Commission proposed to
clarify that trade option counterparties that are Non-SD/MSPs need only
comply with the applicable recordkeeping provisions in Sec. 45.2,\57\
along with the following proposed qualification: The Non-SD/MSP trade
option counterparty must obtain an LEI pursuant to Sec. 45.6 and
provide such LEI to its counterparty if that counterparty is an SD/MSP.
This proposed amendment would allow a trade option counterparty that is
an SD/MSP to comply with applicable part 45 swap data recordkeeping and
reporting obligations by properly identifying its Non-SD/MSP trade
option counterparty by that counterparty's LEI.\58\
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\56\ See 80 FR at 26204; see also notes 30-32 and accompanying
text, supra.
\57\ Trade option counterparties that are SD/MSPs shall continue
to comply with the swap data recordkeeping requirements of part 45,
as they would in connection with any other swap. See 17 CFR 32.3(c).
\58\ An SD/MSP that otherwise would report the trade option at
issue pursuant to Sec. 32.3(c) is required to identify its
counterparty to the trade option by that counterparty's LEI in all
recordkeeping as well as all swap data reporting. See 17 CFR 23.201,
23.204, and 45.6.
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Electric Associations, COPE, IECA and Southern each recommended
further reduction of trade option recordkeeping requirements for Non-
SD/MSPs.\59\ Electric Associations commented that various types of end-
users currently maintain records of trade options in ``different
systems, in different formats and for different retention periods than
transactions referencing the same commodities that are intended to be
financially settled, causing such records to not be retrievable in the
same manner or format, or as quickly, as financially settled
transactions.'' \60\ COPE commented that compliance with part 45
recordkeeping requirements in connection with trade options is
burdensome for end-users, who must ``identify and segregate trade
options from other physical contracts, maintain the material required
by CFTC regulations, and be prepared to provide requested data to the
CFTC within five
[[Page 14971]]
days.'' \61\ COPE recommended allowing physical end-users to keep
records of trade options ``in a manner no less stringent than that used
for their physical commercial agreements, with an obligation to provide
copies to the CFTC in a commercially reasonable time upon request.''
\62\ Southern recommended that the Commission provide further relief by
permitting Non-SD/MSPs to ``maintain the documents that they would
otherwise already maintain in their ordinary course of business.'' \63\
Southern further commented that the recordkeeping requirements under
Sec. 45.2(b) are ``very broad and vague,'' and that carrying forward
these requirements will result in a ``tremendous burden'' on Non-SD/
MSPs, who ``will need to undergo a significant effort to ensure `full,
complete, and systematic records, together will all pertinent data and
memoranda' are maintained for every trade option.'' \64\ The Commission
did not receive any comments specifically addressing the requirement
that a Non-SD/MSP trade option counterparty would need to obtain an LEI
pursuant to Sec. 45.6 and provide such LEI to its counterparty if that
counterparty is an SD/MSP.
---------------------------------------------------------------------------
\59\ See Electric Associations at 10-11; COPE at 2-3; IECA at 2-
5; Southern at 4-5.
\60\ Electric Associations at 11.
\61\ COPE at 2-3.
\62\ Id. at 3.
\63\ Southern at 4.
\64\ Id.
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The Commission recognizes that requiring Non-SD/MSPs to comply with
the swap data recordkeeping requirements of part 45 in connection with
their trade options may result in burdens and costs for such
participants, especially for small end users. The Commission believes
that it would be appropriate to alleviate such burdens and costs for
these market participants, without compromising the Commission's
ability to properly oversee trade option activities. In particular, the
Commission expects that Non-SD/MSPs maintain records concerning their
trade option activities in the ordinary course of business.
Furthermore, the Commission will remain able to collect information
concerning trade option activities as necessary. For example, where a
Non-SD/MSP enters into a trade option opposite an SD/MSP, the SD/MSP
counterparty must continue to comply with all applicable swaps-related
recordkeeping and reporting requirements of part 45 with respect to
that transaction.\65\ In order to facilitate such reporting and
recordkeeping by trade option counterparties that are SD/MSPs, the
Commission will adopt, as proposed, the requirement that a Non-SD/MSP
trade option counterparty must obtain an LEI pursuant to Sec. 45.6 and
provide such LEI to its counterparty if that counterparty is an SD/MSP.
As stated above, this requirement allows an SD/MSP to properly identify
its Non-SD/MSP trade option counterparty by that counterparty's LEI in
all swap data recordkeeping and reporting relating to that
transaction.\66\ As a result, the Commission will be able to gain
insight into any trade option entered into by a Non-SD/MSP opposite a
counterparty that is an SD/MSP. Additionally, under Sec.
32.3(c)(2)[renumbered Sec. 32.3(c)(1)], Non-SD/MSPs that are clearing
members shall continue to comply with part 20 reporting and
recordkeeping requirements in connection with their trade option
activities.\67\
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\65\ Trade option counterparties that are SD/MSPs shall continue
to comply with the swap data recordkeeping and reporting
requirements of part 45, as they would in connection with any other
swap. See 17 CFR 32.3(c).
\66\ See 17 CFR 32.3(c).
\67\ 17 CFR 32.3(c)(1); 17 CFR part 20. A clearing member, as
defined in Sec. 20.1, means any person who is a member of, or
enjoys the privilege of, clearing trades in its own name through a
clearing organization. Section 20.6(d) requires that all books and
records required to be kept under Sec. 20.6 shall be furnished upon
request to the Commission along with any pertinent information
concerning such positions, transactions, or activities. The
recordkeeping duties imposed by Sec. 20.6 are in accordance with
the requirements of Regulation 1.31. See 17 CFR 20.6(a)-(b).
---------------------------------------------------------------------------
Accordingly, the Commission is amending regulation Sec. 32.3(b) by
deleting the requirement that a Non-SD/MSP must comply with the
recordkeeping requirements of part 45 (as otherwise applicable to any
swap) in connection with its trade option activities, subject to the
exception that a Non-SD/MSP trade option counterparty must obtain an
LEI pursuant to Sec. 45.6 and provide such LEI to its counterparty if
that counterparty is an SD/MSP.
C. Applicability of Position Limits to Trade Options
Existing Commission regulation Sec. 32.3(c)(2) subjects trade
options to part 151 position limits, to the same extent that part 151
would apply in connection with any other swap.\68\ However, as stated
above, part 151 has been vacated.\69\ Furthermore, trade options are
not subject to position limits under the Commission's current part 150
position limit regime.\70\
---------------------------------------------------------------------------
\68\ See 17 CFR 32.3(c)(2).
\69\ See note 13 and accompanying text, supra.
\70\ Under current Sec. 150.2, position limits apply to
agricultural futures in nine listed commodities and options on those
futures. Since trade options are not options on futures, Sec. 150.2
position limits do not currently apply to such transactions. See 17
CFR 150.2.
---------------------------------------------------------------------------
In the Proposal, the Commission proposed to amend existing Sec.
32.3(c) by deleting Sec. 32.3(c)(2), including the reference to
vacated part 151, because position limits do not currently apply to
trade options. The Commission explained in the Proposal that this would
not be a substantive change.\71\ Accordingly, for the reasons stated
above, the Commission is deleting the cross-reference to vacated part
151 position limits from Sec. 32.3(c), as proposed.
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\71\ 80 FR at 26204-05.
---------------------------------------------------------------------------
Several commenters requested assurance from the Commission that
federal speculative position limits will not apply to trade options in
the future as a result of the pending position limits rulemaking, which
remains in the proposed rulemaking stage.\72\ The Commission believes
that federal speculative position limits should not apply to trade
options. To that end, the Commission intends to address this matter in
the context of the proposed rulemaking on position limits, if such rule
is adopted.
---------------------------------------------------------------------------
\72\ See, e.g., AGA at 8-9; Electric Associations at 14-15; CEWG
at 2-3; APGA at 2; NGSA at 2; IECA at 6-7; Southern at 5-6. On
December 12, 2013, the Commission published in the Federal Register
a notice of proposed rulemaking to establish speculative position
limits for 28 exempt and agricultural commodity futures and options
contracts and the physical commodity swaps that are economically
equivalent to such contracts, including trade options. See Position
Limits for Derivatives, Proposed Rules, 78 FR 75680 (Dec. 12, 2013)
(``Position Limits Proposal''). Therein, the Commission proposed
replacing the cross-reference to vacated part 151 in Sec.
32.3(c)(2) with a cross-reference to amended part 150 position
limits. See 78 FR at 75711. As an alternative in the Position Limits
Proposal, the Commission proposed to exclude trade options from
speculative position limits and proposed an exemption for commodity
derivative contracts that offset the risk of trade options.
---------------------------------------------------------------------------
III. Related Matters
A. Cost Benefit Analysis
1. Background
As discussed above, the Commission is adopting amendments to the
trade option exemption in Sec. 32.3 that: (1) Eliminate the part 45
reporting requirement for trade option counterparties that are Non-SD/
MSPs; (2) eliminate the Form TO filing requirement; (3) eliminate the
part 45 recordkeeping requirements for trade option counterparties that
are Non-SD/MSPs, with the exception being that a Non-SD/MSP trade
option counterparty must obtain an LEI pursuant to Sec. 45.6 and
provide such LEI to its counterparty if that counterparty is an SD/MSP;
and (4) eliminate reference to the now-vacated part 151 position
limits. In issuing this final rule, the Commission
[[Page 14972]]
has reviewed all relevant comment letters and taken into account
significant issues raised therein.\73\
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\73\ See note 35 and accompanying text, supra.
---------------------------------------------------------------------------
The Commission believes that the baseline for this cost and benefit
consideration is existing Sec. 32.3. Although No-Action Letter 13-08,
as discussed above, has offered no-action relief that is similar to
certain aspects of the relief provided by this final rule, as a no-
action letter, it only represents the position of the issuing Division
or Office and cannot bind the Commission or other Commission staff.\74\
Consequently, the Commission believes that No-Action Letter 13-08
should not set or affect the baseline against which the Commission
considers the costs and benefits of this final rule.
---------------------------------------------------------------------------
\74\ See 17 CFR 140.99(a)(2). See also No-Action Letter 13-08 at
5.
---------------------------------------------------------------------------
In the Proposal, the Commission invited comment on all aspects of
its consideration of the costs and benefits associated with the
Proposal, and the five factors the Commission is required to consider
under CEA section 15(a). The Commission did not receive any comments
from the public in this regard.
2. Costs
The Commission has considered whether elimination of part 45
reporting and recordkeeping requirements for trade option
counterparties that are Non-SD/MSPs and the Form TO filing requirement
could potentially reduce the amount of information available to the
Commission to fulfill its regulatory mission, which could be a cost to
the markets or the general public. However, the Commission shall remain
able to collect sufficient information concerning trade option
activities to fulfill its regulatory mission.\75\
---------------------------------------------------------------------------
\75\ See notes 65-67 and accompanying text.
---------------------------------------------------------------------------
The Commission expects that Non-SD/MSPs will continue to maintain
records concerning their trade option activities in the ordinary course
of business. Additionally, where a Non-SD/MSP enters into a trade
option opposite an SD/MSP, the SD/MSP counterparty must continue to
comply with all applicable swaps-related recordkeeping and reporting
requirements of part 45 with respect to that transaction. In order to
facilitate such reporting and recordkeeping by trade option
counterparties that are SD/MSPs, the Commission has adopted a
requirement in amended Sec. 32.3(b) that a Non-SD/MSP trade option
counterparty must obtain an LEI pursuant to Sec. 45.6 and provide such
LEI to its counterparty if that counterparty is an SD/MSP. As stated
above, this requirement allows an SD/MSP to properly identify its Non-
SD/MSP trade option counterparty by that counterparty's LEI in all swap
data recordkeeping and reporting.\76\ Thus, the Commission may continue
to gain insight into any trade option entered into by a Non-SD/MSP
opposite a counterparty that is an SD/MSP. Furthermore, under Sec.
32.3(c)(1), Non-SD/MSPs that are clearing members shall continue to
comply with part 20 reporting and recordkeeping requirements in
connection with their trade option activities. Therefore, the
Commission believes that this final rule will not impose any additional
costs on the markets themselves, or on the general public.
---------------------------------------------------------------------------
\76\ See 17 CFR 32.3(b).
---------------------------------------------------------------------------
3. Benefits
The Commission believes that this final rule has the benefit of
reducing the regulatory burdens imposed by Sec. 32.3(b), particularly
through the elimination of part 45 reporting and recordkeeping
requirements for trade option counterparties that are Non-SD/MSPs and
the Form TO filing requirement, each of which commenters have described
as burdensome.\77\
---------------------------------------------------------------------------
\77\ See notes 39, 42-46, and 59-64, and accompanying text,
supra.
---------------------------------------------------------------------------
4. Section 15(a) Factors
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the CEA or issuing certain orders.\78\ Section 15(a) further
specifies that the costs and benefits shall be evaluated in light of
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors.
---------------------------------------------------------------------------
\78\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
a. Protection of Market Participants and the Public
The Commission recognizes that there may be trade-offs between
reducing regulatory burdens and ensuring that the Commission has
sufficient information to fulfill its regulatory mission. As discussed
above, the amendments to Sec. 32.3 reduce some of the regulatory
burdens on end users while still maintaining the Commission's insight
into the market for trade options, as necessary, to protect the public.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
The Commission believes that the amendments to Sec. 32.3 will
reduce reporting and recordkeeping burdens on Non-SD/MSPs in the market
for trade options, and will allow them to reallocate resources
dedicated to trade options reporting to other more efficient purposes.
Despite the deletion of swaps-related recordkeeping requirements in
connection with trade options between two Non-SD/MSP counterparties,
the Commission shall remain able to collect information concerning
trade options as necessary to use in its market oversight role, thereby
fulfilling the purposes of the CEA.\79\
---------------------------------------------------------------------------
\79\ See, e.g., 7 U.S.C. 5 (stating that it is a purpose of the
CEA to deter disruptions to market integrity). See also notes 65-67
and accompanying text.
---------------------------------------------------------------------------
The Commission believes that the amendments to Sec. 32.3 will not
have any competitiveness impact because the amendments apply to all
Non-SD/MSP trade option counterparties in the same way. Although the
obligations of SD/MSPs under the amended rule differ from those of Non-
SD/MSPs, the Commission does not believe that these differences relate
to any factors of competition between the two types of trade option
counterparties.
c. Price Discovery
The Commission believes that the amendments to Sec. 32.3 will
likely not have a significant impact on price discovery. Given that
trade options are not subject to the real-time reporting requirements
applicable to other swaps, meaning that current prices of consummated
trade options are likely not available to many market participants, the
Commission believes any effect on price discovery will be negligible.
d. Sound Risk Management Practices
The Commission believes that this final rule will not have a
meaningful adverse effect on the risk management practices of the
affected market participants and end users. Although the final rule is
intended to reduce some of the regulatory burdens on certain market
participants and end users, the Commission expects that where two Non-
SD/MSPs enter into a trade option with one another, each participant
will continue to maintain records concerning that contract, and its
exercise, in its ordinary course of business. Furthermore, the
Commission shall
[[Page 14973]]
remain able to collect information concerning trade options as
necessary to fulfill its regulatory mission.
e. Other Public Interest Considerations
The Commission has not identified any other public interest
considerations for this final rule. As noted above, these amendments to
Sec. 32.3 will reduce some regulatory burdens while maintaining the
Commission's access to information to fulfill its regulatory mission.
B. Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') requires that agencies
consider whether the rules they issue will have a significant economic
impact on a substantial number of small entities and, if so, provide a
regulatory flexibility analysis respecting the impact.\80\ The final
rule, in amending Sec. 32.3, will affect the recordkeeping and
reporting requirements for Non-SD/MSP counterparties relying on the
trade option exemption in Sec. 32.3. Pursuant to the eligibility
requirements in Sec. 32.3(a), such a Non-SD/MSP may be an ECP and/or a
commercial party (i.e., a producer, processor, or commercial user of,
or a merchant handling the exempt or agricultural commodity that is the
subject of the commodity option transaction, or the products or by-
products thereof) offering or entering into the trade option solely for
purposes related to its business as such. Although the Commission has
previously determined that ECPs are not small entities for RFA
purposes,\81\ the Commission is not in a position to determine whether
non-ECP commercial parties affected by the amendments would include a
substantial number of small entities on which the rule would have a
significant economic impact because Sec. 32.3 does not subject such
entities to a minimum net worth requirement, allowing commercial
entities of any economic status to enter into exempt trade options.
Therefore, pursuant to 5 U.S.C. 604, the Commission offers this
regulatory flexibility analysis addressing the impact of the proposal
on small entities:
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\80\ See 5 U.S.C. 601 et seq.
\81\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25,
2001).
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(1) A Statement of the Need for, and Objectives of, the Rule.
The Commission is taking this regulatory action to modify the trade
option exemption in Sec. 32.3 in response to comments from Non-SD/MSPs
that the regulatory burdens currently imposed by Sec. 32.3 are
unnecessarily burdensome. The objective for issuing this rule is to
reduce the recordkeeping and reporting obligations for trade option
counterparties that are Non-SD/MSPs. As stated above, the legal basis
for the rule is the Commission's plenary options authority in CEA
section 4c(b).
(2) Summary of the significant issues raised by public comment on the
Commission's initial analysis, the Commission's assessment of such
issues, and a statement of any changes made as a result of such
comments.
The Commission did not receive any comment on the initial
regulatory flexibility analysis.
(3) A description of, and an estimate of, the number of small entities
to which the rule will apply or an explanation of why no such estimate
is available.
The small entities to which the rule may apply are those commercial
parties that would not qualify as ECPs and/or that fall within the
definition of a ``small entity'' under the RFA, including size
standards established by the Small Business Administration.\82\
Although more than 300 Non-SD/MSPs have reported their use of trade
options to the Commission annually through Form TO, the limited
information provided by Form TO is not sufficient for the Commission to
determine whether and how many of those Non-SD/MSPs qualify as small
entities under the RFA.
---------------------------------------------------------------------------
\82\ See id. See also 5 U.S.C. 601(3) (defining ``small
business'' to have the same meaning as the term ``small business
concern'' in the Small Business Act); 15 U.S.C. 632(a)(1) (defining
``small business concern'' to include an agricultural enterprise
with annual receipts not in excess of $750,000); 13 CFR 121.201
(establishing size standards for small business concerns).
(4) A description of the projected reporting, recordkeeping, and other
compliance requirements of the rule, including an estimate of the
classes of small entities which will be subject to the requirement and
the type of professional skills necessary for preparation of the report
---------------------------------------------------------------------------
or record.
The rule will relieve trade option counterparties that are Non-SD/
MSPs, which may include small entities, from certain recordkeeping and
reporting requirements that would otherwise apply to them in connection
with their trade option activities, such as part 45 reporting and
recordkeeping requirements, and Form TO reporting requirements.
(5) A description of any significant alternatives to the rule which
accomplish the stated objectives of applicable statutes and which
minimize any significant economic impact of the rule on small entities.
A potential alternative to relieving Non-SD/MSPs, which may include
small entities, from certain recordkeeping and reporting requirements
would be to either (1) not amend the current rule, which would maintain
certain recordkeeping and reporting requirements that Non-SD/MSPs have
represented are onerous, or (2) create a rule with more specific
reporting and recordkeeping parameters for specific entities. The
Commission believes that this final rule will have a positive economic
impact on Non-SD/MSPs that are small entities because it would
generally relax reporting and recordkeeping requirements across all
trade option counterparties that are Non-SD/MSPs.
Therefore, the Chairman, on behalf of the Commission, hereby
certifies pursuant to 5 U.S.C. 605(b) that this final rule will not
have a significant economic impact on a substantial number of small
entities.
C. Paperwork Reduction Act
The purposes of the Paperwork Reduction Act of 1995 (``PRA'') are,
among other things, to minimize the paperwork burden to the private
sector, ensure that any collection of information by a government
agency is put to the greatest possible uses, and minimize duplicative
information collections across the government.\83\ The PRA applies to
all information, ``regardless of form or format,'' whenever the
government is ``obtaining, causing to be obtained [or] soliciting''
information, and includes required disclosure to third parties or the
public, of facts or opinions, when the information collection calls for
answers to identical questions posed to, or identical reporting or
recordkeeping requirements imposed on, ten or more persons.\84\ The PRA
requirements have been determined to include not only mandatory but
also voluntary information collections, and include both written and
oral communications.\85\ Under the PRA, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number from
the Office of Management and Budget (``OMB'').
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\83\ See 44 U.S.C. 3501.
\84\ See 44 U.S.C. 3502.
\85\ See 5 CFR 1320.3(c)(1).
---------------------------------------------------------------------------
The Commission believes that this final rule will not impose any
new information collection requirements that require approval of OMB
under the PRA. As a general matter, the final rule relaxes reporting
and recordkeeping
[[Page 14974]]
requirements for Non-SD/MSPs entering into trade options in connection
with their respective businesses, including the withdrawal and removal
of Form TO. Additionally, the Commission has chosen not to adopt as
part of this final rule the proposed Notice Requirement, i.e., the
proposed $1 Billion Notice and Alternative Notice requirements. Since
this final rule does not impose any new information collection
requirements, the final rule therefore does not result in the creation
of any new information collection subject to OMB review or approval
under the PRA. Furthermore, the Commission believes that this final
rule will not cause a material net reduction in the current part 45 PRA
burden estimates (OMB control number 3038-0096) to the extent that such
reduced recordkeeping and reporting burdens for trade option
counterparties that are Non-SD/MSPs will be insubstantial when compared
to the overall part 45 PRA burden estimate as it relates to Non-SD/
MSPs.
Accordingly, since there is no longer a need for Form TO, and since
there will not be any other reporting or recordkeeping requirement
falling under OMB Control Number 3038-0106, the Commission will file a
request with OMB to discontinue OMB Control Number 3038-0106 (Form TO,
Annual Notice Filing for Counterparties to Unreported Trade Options).
List of Subjects in 17 CFR Part 32
Commodity futures, Consumer protection, Fraud, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 32 as follows:
PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS
0
1. The authority citation for part 32 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted.
0
2. Revise Sec. 32.3 to read as follows:
Sec. 32.3 Trade options.
(a) Subject to paragraphs (b), (c), and (d) of this section, the
provisions of the Act, including any Commission rule, regulation, or
order thereunder, otherwise applicable to any other swap shall not
apply to, and any person or group of persons may offer to enter into,
enter into, confirm the execution of, maintain a position in, or
otherwise conduct activity related to, any transaction in interstate
commerce that is a commodity option transaction, provided that:
(1) Such commodity option transaction must be offered by a person
that has a reasonable basis to believe that the transaction is offered
to an offeree as described in paragraph (a)(2) of this section. In
addition, the offeror must be either:
(i) An eligible contract participant, as defined in section 1a(18)
of the Act, as further jointly defined or interpreted by the Commission
and the Securities and Exchange Commission or expanded by the
Commission pursuant to section 1a(18)(C) of the Act; or
(ii) 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 by-products thereof, and such offeror
is offering or entering into the commodity option transaction solely
for purposes related to its business as such;
(2) The offeree must be 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 by-products thereof,
and such offeree is offered or entering into the commodity option
transaction solely for purposes related to its business as such; and
(3) The commodity option must be intended to be physically settled,
so that, if exercised, the option would result in the sale of an exempt
or agricultural commodity for immediate or deferred shipment or
delivery.
(b) In connection with any commodity option transaction entered
into pursuant to paragraph (a) of this section, every counterparty that
is not a swap dealer or major swap participant shall obtain a legal
entity identifier pursuant to Sec. 45.6 of this chapter if the
counterparty to the transaction involved is a swap dealer or major swap
participant, and provide such legal entity identifier to the swap
dealer or major swap participant counterparty.
(c) In connection with any commodity option transaction entered
into pursuant to paragraph (a) of this section, the following
provisions shall apply to every trade option counterparty to the same
extent that such provisions would apply to such person in connection
with any other swap:
(1) Part 20 (Swaps Large Trader Reporting) of this chapter;
(2) Subpart J of part 23 (Duties of Swap Dealers and Major Swap
Participants) of this chapter;
(3) Sections 23.200, 23.201, 23.203, and 23.204 of subpart F of
part 23 (Reporting and Recordkeeping Requirements for Swap Dealers and
Major Swap Participants) of this chapter; and
(4) Section 4s(e) of the Act (Capital and Margin Requirements for
Swap Dealers and Major Swap Participants).
(d) Any person or group of persons offering to enter into, entering
into, confirming the execution of, maintaining a position in, or
otherwise conducting activity related to a commodity option transaction
in interstate commerce pursuant to paragraph (a) of this section shall
remain subject to part 180 (Prohibition Against Manipulation) and Sec.
23.410 (Prohibition on Fraud, Manipulation, and other Abusive
Practices) of this chapter and the antifraud, anti-manipulation, and
enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A),
4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act.
(e) The Commission may, by order, upon written request or upon its
own motion, exempt any person, either unconditionally or on a temporary
or other conditional basis, from any provisions of this part, and the
provisions of the Act, including any Commission rule, regulation, or
order thereunder, otherwise applicable to any other swap, other than
Sec. 32.4, part 180 (Prohibition Against Manipulation), and Sec.
23.410 (Prohibition on Fraud, Manipulation, and other Abusive
Practices) of this chapter, and the antifraud, anti-manipulation, and
enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A),
4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act, if it finds, in its
discretion, that it would not be contrary to the public interest to
grant such exemption.
Appendix A to 17 CFR part 32 [Removed]
0
3. Remove appendix A to 17 CFR part 32.
Issued in Washington, DC, on March 16, 2016, by the Commission.
Christopher J. Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Trade Options--Commission Voting Summary, Chairman's
Statement, and Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Massad and Commissioners Bowen and
Giancarlo voted in the affirmative. No Commissioner voted in the
negative.
Appendix 2--Statement of Chairman Timothy G. Massad
Today, the CFTC has taken another important step to address the
concerns of commercial end-users who rely on the
[[Page 14975]]
derivatives markets to hedge risk--and who, we should always
remember, did not cause the financial crisis. Trade options are a
type of commodity option primarily used in the agricultural, energy
and manufacturing sectors. Today, the Commission has finalized some
amendments to its rules that recognize trade options are different
from the swaps that are the focus of the Dodd-Frank reforms. These
changes will reduce the burdens on these commercial businesses and
allow them to better address commercial risk.
The action we have taken today will eliminate any potential
obligation of commercial participants, who are not swap dealers (SD)
or major swap participants (MSP), to report trade options to a swap
data repository. We also have eliminated the requirement that these
entities must report their trade option activities on ``Form TO,''
and we have eliminated Form TO altogether. Further, we have ended
the swap-related recordkeeping requirements for these end-users in
connection with their trade option activities, although when
transacting in trade options with SDs or MSPs, they will need to
obtain a legal entity identifier. These changes will reduce burdens
and costs for trade option counterparties that are not SDs or MSPs
and, in particular, for smaller end-users.
We also have decided not to impose a requirement in the proposed
rule that a commercial participant would need to provide notice to
the Commission of its trade options activities if such activities
have a value of more than $1 billion in any calendar year. This
followed careful consideration of the benefits of such information
to the Commission, as compared with the difficulties commercial end-
users would face in valuating, tracking, and classifying their trade
options.
I'm pleased that today we have addressed some reasonable
concerns of commercial end-users who are the critical users of the
derivatives markets. This is just one of the many actions we have
taken in this regard. We will continue to evaluate our rules with an
eye towards the concerns of these businesses. I thank my fellow
Commissioners for supporting today's action.
Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen
Our ruling today provides additional clarity for trade options,
but I encourage market participants to look at it closely.
Trade options have been caught in a difficult legal bind.
Congress sought to ensure that people could not evade our swaps
regulations. It did so by both having a very broad definition of a
swap, while also limiting this Commission's authority to exempt
swaps by regulation.
Fortunately, however, Congress preserved the Commission's
authority to exempt trade options, which is the authority we are
once again using today. Importantly, this exemption provides
additional legal certainty that our interpretations cannot. But we
cannot overrule the Commodity Exchange Act with regulations and
interpretations; we will always be bound by that statute. Therefore,
I want to caution anyone tempted to rely on an interpretation to
avoid CFTC jurisdiction when it comes to options.
I fully recognize the difficulty in distinguishing between
different types of physical contracts. If a particular contract or
an element of a contract serves an economic purpose similar to an
option, I believe the best course of action is to exercise caution
and not assume your contract is outside of our jurisdiction based on
an interpretation. While it may seem fine for a person using these
contracts to hope that the interpretation is not called into
question, I believe it would be wise, as a backstop, to make sure it
also falls within the trade option exemption.
[FR Doc. 2016-06260 Filed 3-18-16; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: March 21, 2016