United States: Swaps End-User Update - CFTC Proposes Reporting And Recordkeeping Relief For Commodity Trade Options

Last Updated: May 12 2015
Article by John S. Servidio and Bo Harvey

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 option1 that meets three conditions: (1) the option is offered byeither 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 toa commercial participant; and (3) the option is intended to be physically settledso 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) file 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.

Next Steps

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.


1. 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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