The CFTC recently issued Final Rules eliminating the requirement that commercial end-users of derivatives file an annual Form TO for reporting certain information about their use of commodity trade options. The agency confirmed that, in light of the Final Rules, the Form TO that was due by April 1, 2016, with respect to trade option activity during 2015 need not be filed.
Summary of the Final Rules
The elimination of Form TO had long been expected, as the CFTC’s proposal to do so (discussed in our prior Blog Post) received widespread support in the public comments. But in a surprising turn of events, the Final Rules go further than the proposal in reducing regulatory requirements on end-users with respect to trade options. Specifically:
- The Final Rules also eliminate the swap recordkeeping requirements for trade options entered into by end-users. The CFTC stated that it simply “expects” end-users to “maintain records concerning their trade option activities in the ordinary course of business.”
- The Final Rules did not adopt a proposed requirement that, in lieu of filing Form TO, end-users send an e-mail notice to CFTC staff if they enter into trade options with an aggregate notional value exceeding $1 billion in any calendar year. Under the Final Rules, end-users are not required to provide any type of reporting or notice to the CFTC regarding trade options.
- On the topic of position limits, although the Final Rules state that the CFTC will address the issue formally in any amended position limits rules that may be issued, they also state unequivocally that “federal speculative position limits should not apply to trade options.”
The bottom line
As a result of the Final Rules, the only requirements that apply to trade options entered into by end-users are now as follows:
- If the end-user enters into a trade option with a swap dealer or major swap participant (MSP), it must obtain a Legal Entity Identifier (LEI) and provide its LEI to the swap dealer or MSP counterparty (because swap dealers and MSPs, unlike end-users, continue to have various obligations with regard to trade options under the CFTC’s rules);
- End-users should maintain records concerning their trade option activities in the ordinary course of business; and
- The CFTC’s anti-fraud and anti-manipulation provisions continue to apply to all trade options, including those entered into by end-users.
The big picture
The Final Rules reflect the CFTC’s belated recognition that physical delivery options, as CFTC Chairman Massad said in a statement supporting the Final Rules, “are different from the swaps that are the focus of the Dodd-Frank reforms.” The CFTC has now largely abandoned its attempt at “regulation lite” for end-users that enter into commodity trade options. It was a misguided attempt in the first instance – imposing burdensome obligations on commercial businesses that did not cause the financial crisis, but rather were its victims – and it will not be missed.