CFTC Grants Relief to DCM and DCO on Fully Collateralized Contracts

The CFTC’s Divisions of Market Oversight and Clearing and Risk ("Divisions") issued a no-action letter granting a designated contract market ("DCM") and its affiliated derivatives clearing organization ("DCO") relief from certain swap data reporting and recordkeeping requirements for fully collateralized binary option and variable payout contracts cleared under their rules.

In the letter, the Divisions explained that the DCM's contracts are fully collateralized and cleared exclusively through the DCO, with no third-party clearing members. Structured as either fixed binary payouts or prorated variable payouts, the DCM argued the products, though technically "swaps" under the Commodity Exchange Act, more closely resemble standardized, exchange-traded options on futures than bespoke OTC swaps.

The Divisions stated they will not recommend enforcement action against the DCM or DCO, or their participants for failure to comply with reporting and recordkeeping requirements under CFTC Rules 38.8(b) ("Listing of swaps on a designated contract market"), 38.10 ("Reporting of swaps traded on a designated contract market") and 38.951 ("Boards of trade operating both a designated contract market and a swap execution facility")—but only to the extent that Rule 38.951 requires compliance with Part 45—as well as Rule 39.20(b)(2) ("Recordkeeping"), and Parts 43 ("Real-Time Public Reporting") and 45 ("Swap Data Recordkeeping and Reporting Requirements") of the Commission's regulations.

The no-action relief is subject to several conditions: (i) all contracts must be fully collateralized; (ii) all contracts must be cleared exclusively through the DCO; (iii) the DCM must publish near-real-time trade data on its website, including times, contract, quantity, and price; (iv) the DCM must provide transaction-level information to the CFTC as required under Regulation 16.02; (v) the DCM and DCO must comply with all other applicable reporting and recordkeeping obligations; (vi) participants may not clear contracts through third-party clearing members; and (vii) the DCM must maintain required records and make them available to regulators upon request.