CFTC Standardizes Swap-Reporting Relief for Event Contracts

The CFTC Division of Market Oversight and Division of Clearing and Risk issued a consolidated no-action letter that allows designated contract markets ("DCMs") and derivatives clearing organizations ("DCOs") to report fully collateralized event contracts under the futures and options reporting regime instead of the swap data reporting regime.

The Divisions explained that the Commodity Exchange Act requires every swap to be reported to a swap data repository ("SDR"), which feeds the data to the CFTC and publishes transaction and pricing information. They said that event contracts - binary or variable payout derivatives tied to whether an event occurs - can meet the statutory definition of a swap, but they trade on DCMs and behave like futures and options, with standardized terms, exchange trading, fungibility, and offset. (Before the 2010 Dodd-Frank Act built the SDR regime, DCM-listed binary-option event contracts were reported as futures and options.)

Under the no-action letter, the Divisions will not recommend enforcement against a DCM, a DCO, or their participants for failing to comply with CFTC Rules 38.8(b), 38.10, 38.951 (to the extent it requires Part 45 compliance), and 39.20(b)(2), or with Parts 43 and 45, for covered contracts - those based on the outcome or extent of an occurrence or contingency, listed on a DCM, and traded as fully collateralized positions.The Divisions said the old case-by-case approach was inefficient: rulebook changes forced firms to seek new or modified letters, similar firms risked inconsistent treatment, and DCMs listing binary options faced duplicative reporting. 

The relief carries conditions. The DCM must clear covered contracts through a beneficiary DCO; publish the timestamp, contract, quantity, and price of each trade promptly after execution; provide the CFTC with the required transaction data (CFTC Rule 16.02;) meet all other CFTC reporting and recordkeeping rules; and keep records open to the CFTC, the Department of Justice, the SEC, and prudential regulators.