United States: CFTC No-Action Relief From Potentially Burdensome Requirement For Automated Form 40S Response To CFTC ‘Special Calls

On July 23, the CFTC staff issued No-Action Letter 14-95 (available here) extending the compliance date from August 15, 2014 to February 11, 2016 for use of new Forms 40/40S—reports solicited from market participants by "special call" of the CFTC—and the CFTC's automated filing interface for such Forms. For swap dealers and other market professionals, the relevant effective dates for similar forms have been extended into early 2015. What are these Forms, and under what circumstances might a commercial entity receive such a "special call" from the CFTC?

Periodically, the CFTC Division of Market Oversight issues "special call" letters, seeking information from entities that may hold "reportable positions" in physical (nonfinancial) commodity derivatives. These physical commodity derivatives positions may include futures contracts or exchange-traded options, and may also now include "swaps" that are linked to certain identified futures contracts or the commodity underlying such futures contracts. In the U.S. energy industry, the relevant futures contract is often NYMEX Henry Hub natural gas. Other energy commodity futures contracts (called "covered futures contracts") that may subject a commercial entity to such a special call are: NYMEX No. 2 Heating Oil, New York Harbor, NYMEX Gasoline Blendstock, NYMEX Brent Financial and NYMEX Central Appalachian Coal. CBOT Ethanol is also a covered futures contract.

The CFTC special call letter typically asks the "trader" to comply with its regulatory obligation to file Form 40 or Form 40S, required under Part 20 of the CFTC rules—called the Large Trader Reporting Rules. Smaller commercial market participants tend to be confused by these special calls. These commercial entities, including most electric and natural gas utilities, are not derivatives dealers or futures market professionals. Some do not even trade on futures exchanges, so they have no experience with CFTC's special call process for Form 40 regarding futures contracts. But many such electric and natural gas utilities do regularly enter into over-the-counter energy commodity "swaps," that may be considered by the CFTC to be linked to a covered futures contract or to the underlying physical commodity. These commercial market participants also do not consider themselves large "traders"—many use CFTC-regulated derivatives (now including "swaps") ONLY to hedge or mitigate the commodity-related commercial risks of ongoing energy business operations.

Prior to Dodd-Frank Act amendments to the CFTC rules, the CFTC identified potential recipients of its special calls from futures commission merchant and CFTC-registered intermediary reports of customers that held futures positions. In 2011, the CFTC's new Large Trader Reporting Rules became effective. The CFTC then began receiving reports from swap dealers that identify the swap dealers' counterparties to relevant categories of swaps (including commercial end-users such as energy companies). As a result, if a commercial entity has entered into natural gas swaps (or swaps that may be linked to another covered futures contract or underlying commodity) with a swap dealer—and the swaps were over a certain size—the commercial entity's name is in the CFTC's database to potentially receive a special call.

During the last few years, because the CFTC had not yet finalized a new series of Large Trader Reporting "S" forms (revised to include swaps), the CFTC's special calls have asked commercial end-users to fill out the OLD or "legacy" pre-printed CFTC Form 40 as if it were a Form 40S—covering OTC "swaps" as well as natural gas futures contracts and exchange-traded options. The CFTC has allowed commercial end-users to send the pre-printed form to the CFTC by fax or email. We note that submitting Form 40S has required reading the legacy Form 40 and the instructions thereto as if all the questions in the Form requested information about "swaps." That process has been a considerable challenge for commercial end-users, as it assumes experience in the futures markets, and requires understanding the significant differences in market structure, terminology and concepts between the futures markets and the OTC swaps markets. It also requires an understanding of the many ambiguities in the CFTC's new rules, interpretations and guidance concerning "swaps." The recipient of the special call then must formulate accurate answers to the questions the Form 40S is likely asking about the entity's use of "swaps" in the context of the CFTC's new and evolving regulatory regime.

In November 2013, the CFTC published its final new Large Trader Reporting FORMS—including new Form 40S to be used for its special call authority in respect of "swaps." The new Form 40S wording is substantially similar to the legacy Form 40 (so the form itself continues to be confusing—see the translation issues noted above). In addition, the new Form 40S requirements are different in several ways from the prior Form 40 rules. For example, once effective, the new CFTC rules will require Form 40S to be submitted electronically to the CFTC via an automated web interface. The new Form 40S rules also require the commercial entity that receives such a special call once to CONTINUE TO SUPPLEMENT AND UPDATE its Form 40S, whether or not the entity receives another periodic special call from the CFTC. Energy trade associations objected to the confusing form language, the new electronic interface requirement and the ongoing regulatory update burden for non-CFTC registrants (see the comment letter filed by the NRECA, LPPC and EPSA here). The CFTC rejected those comments in promulgating its final rules.

In the last six months, the CFTC has increased its use of special calls to commercial energy companies that transact in natural gas futures, exchange-traded options and swaps. Some commentators believe that the CFTC is trying to understand the interplay between the regional U.S. natural gas and power markets during the "polar vortex" in the early months of 2014, which corresponded with significant price volatility in certain markets. Other commentators believe the CFTC staff is seeking to update its understanding of the physical commodity markets (and related futures and swaps markets) in general, in anticipation of finalizing the Commission's speculative position limits rules for natural gas and certain other nonfinancial commodities.

Concurrently with this increase in staff activity, the new automated Large Trader Reporting form system is still being built and tested. The new Forms and the automated interface were scheduled to go live on August 15, 2014. Consequently, No-Action Letter 14-95 represents welcome relief.

NOTE: There are conditions to the CFTC staff no-action relief. If an entity (a "trader") receives a special call, it must still respond and file legacy Form 40, or a Form 40S in accordance with the "Legacy 40S reporting practice," described above. Due to the continuing regulatory uncertainty and the ambiguities noted above, commercial end-users are encouraged to consult counsel before responding to such a special call. This is especially important because the Dodd-Frank Act amendments to the CFTC enforcement authority significantly increased the penalties to which corporations and individuals may be subject for submitting inaccurate reports to the CFTC. Also, all the recordkeeping requirements included in the Large Trader Reporting Rules will be effective from and after August 15, 2014. These recordkeeping rules are different than the ordinary course swap transaction recordkeeping rules for non-CFTC registrants that are found in Rule 45.2. Therefore, if you've received a special call for Form 40/40S in the past, or have other reasons to believe that your company may receive such a special call in the future, you should review those recordkeeping rules carefully.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

General

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