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CFTC Grants Relief from Filing Form TO for Certain End-User Trade Options
Practical Law Legal Update w-001-4560 (Approx. 4 pages)
CFTC Grants Relief from Filing Form TO for Certain End-User Trade Options
by Practical Law Finance
| Published on 23 Feb 2016 • USA (National/Federal) |
The CFTC granted relief to end users from filing Form TO in connection with trade options that they enter into which are not otherwise required to be reported to a swap data repository (SDR) under CFTC rules.
On February 18, 2016, the CFTC issued No-Action Letter No. 16-10 (No-action 16-10), which temporarily relieves end users from filing CFTC Form TO in connection with trade options that they enter into which are not otherwise required to be reported to a swap data repository (SDR) under CFTC rules. Trade options are generally commodity options purchased by a commercial party that, if exercised, result in the sale of a physical commodity for immediate (spot) or deferred (forward) delivery.
Form TO apprises the CFTC of an entity's otherwise unreported trade options and is required under CFTC Regulation 32.3(b)(2) (17 C.F.R. § 32.3(b)(2)). The relief has been issued pending a final CFTC rule that would permanently exempt end users from the Form TO requirement (see Legal Update, CFTC Proposes End-user Exemption from Trade Option Reporting).
Generally, under CFTC Regulation 32.3, commodity options that are trade options are exempt from swap requirements under the Commodity Exchange Act (CEA), including Part 45 SDR swap data reporting, provided:
- The transaction is offered by an eligible contract participant (ECP) or a party that is the subject of the commodity option transaction (for instance a producer, processor, or commercial user of the commodity).
- The offeree is a commercial party that enters into the transaction solely for a purpose related to its commercial business.
- The option is intended to be physically settled in a manner that would result in the sale of an exempt (or agricultural) commodity.
- Neither counterparty has reported CFTC Part 45 data for non-trade option swaps to the CFTC during the 12 months preceding the date that the trade option was entered into. If either entity has been a reporting party in the prior 12 months, then the swap should be reported in accordance with Part 45 swap reporting rules (see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules).
If these requirements are met, instead of reporting swap data to an SDR to fulfill Part 45 reporting requirements, the counterparties each must instead file a Form TO by March 1 of the year following the calendar year in which the entity entered into the trade option. Form TO is included in Appendix A of Part 32 of the CFTC's regulations and is intended to provide the CFTC notice that the entities have entered into a unreported trade option.
On May 7, 2015, the CFTC proposed a rule that would exempt entities that are not swap dealers (SDs) or major swap participants (MSPs) from reporting otherwise unreported trade options on Form TO, and would delete Form TO from Appendix A of Part 32 of the CFTC regulations (see Legal Update, CFTC Proposes End-user Exemption from Trade Option Reporting).
While the CFTC is considering finalizing the proposed exemption from Form TO reporting for non-SDs and non-MSPs, the CFTC has recommended that relief be granted to these entities for failure to report otherwise unreported trade options entered into during 2015 on form TO.
The relief provided in No-Action Letter No. 13-08 also continues to apply to non-SD and non-MSP trade-option counterparties, as long as the entity reports its otherwise unreported trade options that occurred in 2015 on Form TO by April 1, 2016.