Swaps End-User Update

CFTC Provides End-Users with Limited Relief from Certain Recordkeeping Requirements

June 4, 2014

On May 22, 2014, the Commodity Futures Trading Commission (CFTC) announced three actions intended to benefit swaps end-users. In order to promote trading on swap execution facilities (SEFs) and designated contract markets (DCMs), the CFTC issued a no-action letter that provides limited relief from complying with certain recordkeeping requirements under CFTC Regulation 1.35 for end-users and other market participants that are members of SEFs and DCMs but are not required to register with the CFTC (Covered Members). As described in our recent Swaps End-User Update on recordkeeping requirements, Regulation 1.35 requires members of DCMs or SEFs to keep records of all documents and all oral and written communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transactions, whether such communications occur by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device or other digital or electronic media. The CFTC’s no-action letter relieves Covered Members from keeping records of digital or electronic written communications, specifically with respect to text messages, as well as written records of all transactions relating to its business of dealing in commodity interests and related cash or forward transactions in a form and manner identifiable and searchable by transaction. However, Covered Members still must keep all other written records (including other types of electronic and digital media such as emails and instant messages) required under Regulation 1.35. This relief from recordkeeping requirements is time-limited and will remain applicable until the effective date of any final action, which may include a rulemaking, an order or a decision by the CFTC to take no further action.

Proposal to Amend the Special Entity De Minimis Threshold Calculation to Exclude Utility Operations-Related Swaps

In the same announcement, the CFTC proposed to permit a person to exclude utility operations-related swaps with utility special entities in calculating the aggregate gross notional amount of the person’s swap positions solely for purposes of the de minimis exception applicable to swaps with special entities. The proposal would amend the CFTC’s definition of swap dealer to permit a person engaging in “utility operations-related swaps” with “utility special entities” to exclude such swaps solely for the purpose of calculating whether they have exceeded the special entity de minimis threshold. The proposal would not, however, permit a person to exclude such utility operations-related swaps for the purpose of calculating the general de minimis threshold for swap dealing. Comments on the CFTC’s proposal to amend the special entity de minimis threshold calculation to exclude utility operations-related swaps must be received by July 2, 2014.

CFTC Reopens Comment Periods for End-User Physical Commodity Hedging Issues

In a third concurrent action, the CFTC announced that it will hold a public roundtable on June 19, 2014, to address issues raised by end-users that trade physical commodity derivatives to hedge commercial risk. The CFTC is also reopening comment periods for two previous proposals, the Position Limits Proposal and the Aggregation Proposal , for a three-week period starting June 12, 2014 (one week before the roundtable), and ending July 3, 2014 (two weeks following the roundtable). To address end-user hedging issues, the CFTC specifically asked market participants to comment on the following:

  • Hedges of a physical commodity by a commercial enterprise − including gross hedging, cross-commodity hedging and anticipatory hedging − and the process for obtaining a nonenumerated exemption;
  • Setting of spot-month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption;
  • Setting of nonspot limits for wheat contracts;
  • Aggregation exemption for certain ownership interests of greater than 50 percent in an owned entity; and
  • Aggregation based on substantially identical trading strategies.

Please contact one of the authors, or your regular McGuireWoods lawyer, if you have any questions regarding recordkeeping requirements or other swaps end-user issues.