CFTC Issues No-Action Relief (Letter 13-08) from Reporting and Recordkeeping for Trade Options
The CFTC’s Division of Market Oversight (DMO) issued a no-action letter for all end-users, allowing them not to report under Part 45 of the CFTC’s regulations, as applicable, commodity trade options (as defined in Part 32), provided that the non-SD/MSP (1) reports such transactions pursuant to Form TO and (2) notifies DMO if it transacts in excess of $1 billion notional value of trade options in any calendar year.
Significantly, market participants that wish to rely on the relief must notify DMO within 30 days after the notional value of their CTOs exceeds $1 billion during a calendar year (the "Notification Requirement"). The relief also provides guidance about how market participants should calculate the aggregate notional value of their CTOs.
Reporting Relief
Pursuant to the relief, all non-SD/MSPs (regardless of whether they otherwise report swaps to an SDR) may now report all of their CTOs annually on the Form TO, provided that the CTOs otherwise meet the requirements of Part 32, and the non-SD/MSP complies with the Notification Requirement (if applicable). Please note that non-SD/MSPs do not elect a reporting party with respect to their CTOs because Form TO requires both non-SD/MSP counterparties to make the annual filing.
This relief does not apply to CTOs where one of the counterparties is an SD/MSP. In this instance, the SD/MSP counterparty must report the CTO to an SDR in compliance with the reporting rules in part 45.
Market participants that are now eligible to use the Form TO for their CTO reporting should familiarize themselves with the data necessary to complete the form and contact CWT with any questions. The first Form TO filing is due on March 1, 2014.
Calculating Gross Notional Value of CTOs
The DMO guidance states that the notional value of a CTO should be calculated by multiplying (1) the maximum volume of the commodity that could be bought or sold pursuant to the option, by (2) the fair market value on the trade date of the maximum volume. If the fair market value is not a fixed number, but rather is to be determined pursuant to a reference price source that is not determinable at the time of execution, the parties should base the calculation on the value of the reference price source at the time of execution.
Additionally, relief is provided with respect to related recordkeeping requirements if the firm entering into the trade option (1) obtains and provides a legal entity identifier to any swap dealer counterparty to its trade options and (2) notifies DMO if it transacts in excess of $1 billion notional value of trade options in any calendar year.
Recordkeeping Relief
CTOs between non-SD/MSP counterparties only will be subject to a subset of the recordkeeping requirements in Part 45 - specifically those requirements set forth in Rule 45.2 (See explanation below) - provided that the CTOs otherwise meet the requirements of Part 32, as well as the Notification Requirement, and that the non-SD/MSP provides its LEI/CICI to its CTO counterparties that are SD/MSPs.
Rule 45.2 requires that each non-SD/MSP "keep full, complete, and systemic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty, including, without limitation, all records demonstrating that they are entitled, with respect to any swap, to elect the clearing exception in CEA section 2(h)(7). CFTC Rule 45.2 also establishes retention requirements for non-SD/MSPs. Because the no-action relief provides that CTOs between non-SD/MSP counterparties are only subject the recordkeeping provisions in CFTC rule 45.2, such transactions are not subject to the recordkeeping provisions of CFTC rule 45.6, which requires swap counterparties to maintain records of each party's legal entity identifier ("LEI" or interim CICI). Therefore, CTOs between non-SD/MSP counterparties are not subject to the Part 45 LEI recordkeeping requirement.
Lofchie Comment: Firms that enter into trade options will be required to institute compliance procedures in order to identify which of their options qualify for the Part 32 relief, and to track the notional value of their trades as against the $1 billion limit, and, if they do exceed such limit, to provide the required notice to the DMO.
See: CFTC Letter 13-08See also: Part 32.3 of the CFTC Regulations (governing trade options)