CFTC Reduces Regulatory Burden on Trade Options
Commentary by Bob Zwirb
The CFTC unanimously approved a final rule amending trade option rules that apply to certain physically settled options. This final rule substantially reduces and/or eliminates certain reporting and recordkeeping requirements for end users entering into trade options. The CFTC confirmed that it does not intend to impose position limits on trade options when it finalizes a proposed position limits rule on futures and swaps.
The final rule includes the following amendments:
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Commercial parties that are neither swap dealers ("SDs") nor major swap participants ("MSPs" or "Non-SDs/MSPs") will be under no obligation to report trade options to a swap data repository.
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Non-SDs/MSPs will no longer be required to report their trade option activities on the "Form TO," which the CFTC has eliminated.
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Non-SDs/MSPs will no longer be required to provide notice to the CFTC of trade option activities that have a value of more than $1 billion in any calendar year.
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Non-SDs/MSPs will no longer be required to comply with swap-related recordkeeping requirements for their trade option activities. However, such parties still must maintain records of such activities "in the ordinary course of business," and when entering into a trade option opposite an SD/MSP, comply with a requirement that they obtain a legal entity identifier and provide it to their SD/MSP counterparties.
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In general, the trade option rules remain in place for counterparties that are SDs/MSPs.
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Trade options also are still subject to the CFTC's anti-fraud and anti-manipulation authority.
A summary and analysis of the CFTC's final rule is provided in the Cadwalader Energy Group's memorandum on the subject (see "Related Links").
Commentary
The final rule contains a lot of good language. Clearly, the drafters recognized the costs and burdens that the unamended rules' recordkeeping and reporting requirements imposed on commercial parties that entered into trade options. The following passage from the final rule typifies the differences between the two versions:
The Commission recognizes that many parties who are not SDs or MSPs and do not engage in significant swap activity apart from trade options do not have the infrastructure in place to support part 45 reporting to [a swap dealer depository] and that instituting such infrastructure would be costly, particularly for small end users.
It is also encouraging that the CFTC has sought expressly to "reduce reporting burdens" for such counterparties, "many of whom face technical and logistical impediments that prevent timely compliance with part 45 reporting requirements." The same level of sensitivity to costs and benefits should be applied to all Dodd-Frank requirements.