United States: CFTC Staff Issues Commodity Option Frequently Asked Questions ("Faqs")

Last Updated: October 7 2013
Article by Julian E. Hammar and Michael R. Sorrell

On September 30, 2013, the CFTC's Division of Market Oversight ("DMO") issued a Commodity Option FAQ document. A copy of the FAQs is available here. While the document largely contains information already set forth in prior CFTC releases, it does contain helpful clarifications of potential interest to clients who enter into commodity options. These clarifications generally relate to the CFTC's "Form TO," the annual reporting form for trade options. They include what trade options must be reported, the reporting period for the first annual Form TO filing, the calculation of the notional amount of embedded options in forward contracts, and the applicability of the Form TO filing requirement to cross-border situations.

A summary of these clarifications is set forth below.


As discussed in the FAQ, commodity options are swaps because they come within the Commodity Exchange Act's ("CEA") definition of the term "swap." Transactions involving an option on a nonfinancial, or "physical," commodity may nevertheless be subject to a narrower set of regulations than those otherwise applicable to swaps. For example, a forward contract with an embedded option that either (1) adjusts the forward price but does not affect the delivery term and meets the 3-part test for such contracts in the CFTC's Product Definitions release or (2) adjusts the delivery term (volumetric option) and meets the 7-part test in the CFTC's Product Definitions release, may be treated as a forward contract excluded from regulation under the CEA (except the anti-fraud and anti-manipulation provisions). And, as discussed further below, trade options—in general, transactions involving an option on a physical commodity between commercial participants that fail to satisfy either the 3-part or 7-part tests contained in the Product Definitions release—are exempt from the majority of Dodd-Frank requirements.

In order to qualify for the trade option exemption, a commodity option must involve a nonfinancial commodity (i.e., an exempt or agricultural commodity) and meet the following conditions:

  • The option is offered by either an "eligible contract participant" as defined in the CEA (generally, a financially sophisticated entity) or a producer, processor, commercial user of, or merchant handling, the underlying physical commodity;
  • The option is offered to a producer processor, commercial user of, or merchant handling the underlying physical commodity; and
  • 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 for immediate or deferred shipment or delivery.

Trade options that meet these conditions are exempt from many of the regulations applicable to swaps and are subject only to certain requirements specified in CFTC Regulation 32.3. These requirements include reporting, recordkeeping, swaps large trader reporting, position limits, certain requirements applicable to trade options offered by swap dealers or major swap participants ("MSPs"), and anti-fraud and anti-manipulation rules. The FAQ's clarifications largely address the reporting requirements applicable to trade options.

Under the trade option exemption, a trade option must be reported to a swap data repository (or, if one is not available, the CFTC) in accordance with Part 45 of the CFTC's regulations, if, during the 12 months prior to the trade option being entered into, one of the counterparties has been obligated to report a non-trade option swap under Part 45. If neither counterparty has had to report non-trade option swaps under Part 45 during that period, then both counterparties may report their trade option transactions annually on the CFTC's Form TO. This form is less burdensome to market participants than Part 45 reporting because it only needs to be filed annually (and therefore not on a transaction-by-transaction basis) and only requires aggregate data (as opposed to data for each transaction). Eligibility to use Form TO has been extended pursuant to a CFTC staff no-action letter so that if one of the parties were required to report non-trade option swaps under Part 45 during the 12-month period (and thus could not use Form TO under the rule) and that party is not a swap dealer or MSP, then it may use Form TO, provided that it notifies CFTC staff no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion in any calendar year by sending an email to TOreportingrelief@cftc.gov.


The Commodity Option FAQ includes the following clarifications regarding reporting requirements under Form TO:

What options are reported—options "entered into" or options "exercised"?

CFTC Rule 32.3(b)(2) and Form TO require that trade options that are "entered into" during the prior calendar year be reported on the form. The form also requires that the approximate total value of physical commodities that the reporting counterparty purchased and/or delivered in connection with options that were "exercised" during the prior calendar year be reported. The FAQ clarifies that trade options that are "entered into" during the calendar year must be reported on Form TO. Accordingly, if a counterparty entered into trade options in 2012 or prior years, did not enter into any trade options during 2013, and exercised its prior year trade options during 2013, it has no reporting obligation under Form TO for 2013. By contrast, if a counterparty with prior-year trade options enters into trade options in 2013, then it must file Form TO and report the approximate amount of trade options exercised, whether entered into in prior years or 2013.

What is the reporting period for the first annual filing due on March 1, 2014?

Form TO must be filed annually, with the first compliance date being March 1, 2014. One question that has arisen involves the reporting period for the filing, which generally is the prior calendar year. The preamble to the Trade Options Exemption and the instructions to Form TO indicate that trade options entered into from January 1, 2013, through December 31, 2013, must be reported on Form TO for the first filing due on March 1, 2014. However, the compliance date for reporting swaps under Part 45 of the CFTC's rules was April 10, 2013, and trade options are not subject to historical reporting for swaps entered into prior to April 10, 2013, under Part 46 of

the CFTC's rules. The FAQ states that the reporting period for the first Form TO filing is for the period from April 10, 2013, through December 31, 2013, rather than as stated in the form instructions. The FAQ reasons that reporting for trade options would not have been required under Part 45 of the CFTC's rules prior to April 10, 2013, and accordingly is not required under Form TO. Similarly, the FAQ clarifies that for 2013 the calculation of the $1 billion aggregate notional value of trade options entered into to be reported under the CFTC no-action letter begins with trade options entered into only on or after April 10, 2013.

How are forwards with embedded volumetric optionality (that fail the 7-part test) and open-ended options calculated for purposes of Form TO and the CFTC staff no-action letter?

The FAQ clarifies that, for purposes of reporting under Form TO and the CFTC staff no-action letter $1 billion notional threshold, a forward with an embedded volumetric option that fails the 7-part test should count toward that notional amount only the amount of the commodity that is subject to the option. This means that the fixed amount delivered or received under the contract need not be reported along with the additional amount delivered or received from the exercise of the volumetric option.

The FAQ also clarifies that the gross notional value of an open-ended option with no maximum amount should be calculated with reference to the maximum volume of the commodity that could be bought or sold under the contract (e.g., the difference between the baseload amount and historical maximum amount used over the same period). To calculate the fair market value of such amount when the option states a reference price rather than a fixed price, an entity should use the current price of the referenced contract.

Do Form TO reporting obligations apply to non-U.S. counterparties?

The FAQ states that Form TO requirements do apply to non-U.S., non-swap dealer/MSP counterparties with respect to trade options with U.S. non-swap dealer/MSP counterparties (i.e., trade options between a non-U.S. commercial end user and a U.S. commercial end user). The non-U.S. commercial end user would only be required to report trade options entered into with U.S. commercial end users in its Form TO filing if those trade options have not otherwise been reported to an SDR. Trade options between

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Julian E. Hammar
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions