On April 30, 2015, the U.S. Commodity Futures Trading Commission (CFTC) approved a
notice of proposed rulemaking (Proposed Rules) to
reduce reporting and recordkeeping obligations for end-users that use commodity trade options (CTOs). CTOs are contracts for the delivery of a physical
commodity (i.e., an energy or agricultural commodity) with an option or embedded option
that meets three conditions: (1) the option is offered by either an “eligible contract participant” or a commercial participant (a producer,
processor or commercial user of, or merchant handling, the underlying physical commodity); (2) the option is offered to a commercial participant;
and (3) the option is intended to be physically settled so that, if exercised, the option would result in the sale of an energy or agricultural
commodity for immediate or deferred shipment or delivery. The Proposed Rules are intended to reduce reporting and recordkeeping requirements where
end-users enter into CTOs with other end-users (i.e., counterparties that are not swap dealers (SDs) or major swap participants (MSPs)).
Current Treatment of CTOs
Currently, an end-user that has entered into a CTO must make a determination as to whether the CTO has previously been reported. Typically, if an end-user
has entered into CTOs with SDs/MSPs then those CTOs have previously been reported by such SDs/MSPs. However, a CTO entered into between two end-users is
likely an “unreported trade option,” except in the unlikely scenario where one or both of the end-users was subject to swap reporting during the 12 months
preceding the date on which the CTO was entered into. If the CTO is an “unreported trade option” then under the CFTC’s
CTO no-action letter from April 2013, an end-user must (1)
Form TO (due March 1 for CTOs traded in the prior calendar year) and (2)
email the CFTC at TOreportingrelief@cftc.gov no later than 30 days after entering into CTOs with an
aggregate notional value in excess of $1 billion in any calendar year ($1 Billion Notice).
In addition to basic
recordkeeping requirements for swaps
generally, an end-user trading a CTO with another end-user must create and maintain records of the “unique swap identifier” (USI) and “unique product
identifier” (UPI), and record the counterparty “legal entity identifier” (LEI), for each CTO transaction. End-users also are required to obtain LEIs when
entering into CTOs with other end-users.
Proposed Treatment of CTOs
Under the Proposed Rules, an end-user would no longer be required to file Form TO, but would still be required to send the $1 Billion Notice to the extent
it enters into CTOs, whether reported or unreported, that exceed the $1 billion threshold. Alternatively, an end-user may provide the $1 Billion Notice
pre-emptively if it “reasonably expects” to enter into CTOs, whether reported or unreported, that exceed the $1 billion threshold (Alternative Notice).
End-users that can reasonably expect to exceed the threshold may want to consider the Alternative Notice as it reduces the monitoring burden and risk of
noncompliance in the event the threshold is exceeded. Notably, the CFTC included a footnote in the Proposed Rules that states: “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.”
Further, under the Proposed Rules end-users would not be required to create and maintain USIs and UPIs, or obtain LEIs, when trading CTOs with other
end-users. End-users trading CTOs would still be subject to
recordkeeping requirements applicable to swaps generally.
CFTC’s Acknowledgement of End-User Concerns
The Proposed Rules are illustrative of the CFTC’s recent focus on addressing the concerns of commercial end-users. CFTC Chairman Massad’s
address at the 18th Annual National Energy Restructuring Conference reflects a
number of areas the CFTC is considering with the intent to alleviate the burden imposed on commercial end-users.
The CFTC is seeking comments on the Proposed Rules. Comments are due on or before June 8, 2015. Please contact one of the authors or your regular
McGuireWoods lawyer if you would like to submit comments or have questions on swaps reporting and recordkeeping rules generally.
The Proposed Rules are separate from the CFTC’s proposed interpretation further clarifying the distinction between a forward contract with
volumetric optionality and a CTO. See Forward Contracts with Embedded Volumetric Optionality, 79 Fed. Reg. 69073 (Nov. 20, 2014). Once the
CFTC issues a final interpretation on what constitutes a forward contract with volumetric optionality as opposed to a CTO, end-users should revisit
their internal categorization of CTOs to ensure alignment with the regulatory definition.