80 FR 26200 - Trade Options
COMMODITY FUTURES TRADING COMMISSION Federal Register Volume 80, Issue 88 (May 7, 2015)
Federal Register Volume 80, Issue 88 (May 7, 2015)
| Page Range | 26200-26210 | |
| FR Document | 2015-11020 |
[Federal Register Volume 80, Number 88 (Thursday, May 7, 2015)] [Proposed Rules] [Pages 26200-26210] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-11020] ======================================================================= ----------------------------------------------------------------------- COMMODITY FUTURES TRADING COMMISSION 17 CFR Part 32 RIN 3038-AE26 Trade Options AGENCY: Commodity Futures Trading Commission. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: The Commodity Futures Trading Commission (the ``Commission'' or the ``CFTC'') is proposing to amend the trade option exemption in its regulations, as described herein, in the following subject areas: Reporting requirements for trade option counterparties that are not swap dealers or major swap participants; recordkeeping requirements for trade option counterparties that are not swap dealers or major swap participants; and certain non-substantive amendments. DATES: Comments must be received on or before June 8, 2015. ADDRESSES: You may submit comments, identified by RIN 3038-AE26, by any one of the following methods:CFTC Web site: http://comments.cftc.gov. Follow the instructions for submitting comments through the Comments Online process on the Web site. Mail: Send to Christopher Kirkpatrick, Secretary of the Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. Hand Delivery/Courier: Same as Mail, above. Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Please submit your comments using only one of these methods. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to www.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act, a petition for confidential treatment of the exempt information may be submitted according to the procedures established in Sec. 145.9 of the CFTC's regulations, 17 CFR 145.9. The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of a submission from www.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the Freedom of Information Act. FOR FURTHER INFORMATION CONTACT: David N. Pepper, Special Counsel, Division of Market Oversight, at (202) 418-5565 or [email protected]; or Elise Pallais, Counsel, Office of the General Counsel, at (202) 418- 5577 or [email protected]; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. SUPPLEMENTARY INFORMATION: I. Introduction In April 2012, pursuant to section 4c(b) of the Commodity Exchange Act [[Page 26201]] (the ``CEA'' or the ``Act''),\1\ the Commission issued a final rule to repeal and replace part 32 of its regulations concerning commodity options.\2\ The Commission undertook this effort to address section 721 of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (the ``Dodd-Frank Act'' or ``Dodd-Frank''),\3\ which, among other things, amended the CEA to define the term ``swap'' to include commodity options.\4\ Notably, Sec. 32.2(a) provides the general rule that commodity option transactions must be conducted in compliance with any Commission rule, regulation, or order otherwise applicable to any other swap.\5\ --------------------------------------------------------------------------- \1\ 7 U.S.C. 6c(b) (providing that ``[n]o person shall offer to enter into, enter into or confirm the execution of, any transaction involving any commodity regulated under this chapter which is of the character of, or is commonly known to the trade as an `option' . . . contrary to any rule, regulation, or order of the Commission prohibiting any such transaction or allowing any such transaction under such terms and conditions as the Commission shall prescribe''). \2\ See Commodity Options, 77 FR 25320 (Apr. 27, 2012) (``Commodity Options Release''). The Commission also issued certain conforming amendments to parts 3 and 33 of its regulations. See id. The Commission's regulations are set forth in Chapter I of Title 17 of the Code of Federal Regulations. \3\ Public Law 111-203, 124 Stat. 1376 (2010). \4\ See 7 U.S.C. 1a(47)(A)(i) (defining ``swap'' to include ``[an] option of any kind that is for the purchase or sale, or based on the value, of 1 or more . . . commodities . . .''); 7 U.S.C. 1a(47)(B)(i) (excluding options on futures from the definition of ``swap''); 7 U.S.C. 1a(36) (defining an ``option'' as ``an agreement, contract, or transaction that is of the character of, or is commonly known to the trade as, an `option' . . .''). The Commission defines ``commodity option'' or ``commodity option transaction'' as ``any transaction or agreement in interstate commerce which is or is held out to be of the character of, or is commonly known to the trade as, an `option,' `privilege,' `indemnity,' `bid,' `offer,' `call,' `put,' `advance guaranty' or `decline guaranty' and which is subject to regulation under the Act and these regulations.'' See 17 CFR 1.3(hh). \5\ See 17 CFR 32.2. --------------------------------------------------------------------------- In response to requests from commenters, the Commission added a limited exception to this general rule for physically delivered commodity options purchased by commercial users of the commodities underlying the options (the ``trade option exemption'').\6\ Adopted as an interim final rule, Sec. 32.3 provides that qualifying commodity options are generally exempt from the swap requirements of the CEA and the Commission's regulations, subject to certain specified conditions. To qualify for the trade option exemption, a commodity option transaction must meet the following requirements: (1) The offeror is either an eligible contract participant (``ECP'') \7\ or a producer, processor, commercial user of, or merchant handling the commodity that is the subject of the commodity option transaction, or the products or byproducts thereof (a ``commercial party'') that offers or enters into the commodity option transaction solely for purposes related to its business as such; (2) the offeree is, and the offeror reasonably believes the offeree to be, a commercial party that is offered or enters into the transaction solely for purposes related to its business as such; and (3) the option is intended to be physically settled so that, if exercised, the option would result in the sale of an exempt or agricultural commodity \8\ for immediate or deferred shipment or delivery.\9\ --------------------------------------------------------------------------- \6\ See 77 FR at 25326-29. See also 17 CFR 32.2(b); 32.3. The interim final rule continued the Commission's long history of providing special treatment to ``trade options'' dating back to the Commission's original trade option exemption in 1976. See Regulation and Fraud in Connection with Commodity and Commodity Option Transactions, 41 FR 5108 (Nov. 18, 1976). \7\ See 7 U.S.C. 1a(18) (defining ``eligible contract participant''); 17 CFR 1.3(m) (further defining ``eligible contract participant''). \8\ See 7 U.S.C. 1a(20) (defining ``exempt commodity'' to mean a commodity that is not an agricultural commodity or an ``excluded commodity,'' as defined in 7 U.S.C. 1a(19)); 17 CFR 1.3(zz)(defining ``agricultural commodity''). Examples of exempt commodities include energy commodities and metals. \9\ See 17 CFR 32.3(a). --------------------------------------------------------------------------- Commodity option transactions that meet these requirements are generally exempt from the provisions of the Act and any Commission rule, regulation, or order promulgated or issued thereunder, otherwise applicable to any other swap, subject to the conditions enumerated in Sec. 32.3(b)-(d).\10\ These conditions include: Recordkeeping and reporting requirements; \11\ large trader reporting requirements in part 20; \12\ position limits under part 151; \13\ certain recordkeeping, reporting, and risk management duties applicable to swap dealers (``SDs'') and major swap participants (``MSPs'') in subparts F and J of part 23; \14\ capital and margin requirements for SDs and MSPs under CEA section 4s(e); \15\ and any applicable antifraud and anti- manipulation provisions.\16\ --------------------------------------------------------------------------- \10\ See 17 CFR 32.3(a), (b)-(d). \11\ See 17 CFR 32.3(b). \12\ See 17 CFR 32.3(c)(1). Applying Sec. 32.3(c)(1), reporting entities as defined in part 20--swap dealers and clearing members-- must consider their counterparty's trade option positions just as they would consider any other swap position for the purpose of determining whether a particular counterparty has a consolidated account with a reportable position. See 17 CFR 20.1. A trade option counterparty would not be responsible for filing large trader reports unless it qualifies as a ``reporting entity,'' as that term is defined in Sec. 20.1. \13\ See 17 CFR 32.3(c)(2). See also Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259, 270 (D.D.C. 2012), vacating the part 151 rulemaking, Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). \14\ See 17 CFR 32.3(c)(3)-(4). Note that Sec. 32.3(c)(4) explicitly incorporates Sec. Sec. 23.201 and 23.204, which require counterparties that are SD/MSPs to comply with part 45 recordkeeping and reporting requirements, respectively, in connection with all their swaps activities (including all their trade option activities). See 17 CFR 23.201(c), 23.204(a). \15\ See 17 CFR 32.3(c)(5). \16\ See 17 CFR 32.3(d). Note that Sec. 32.2 also preserves the continued application of Sec. 32.4, which specifically prohibits fraud in connection with commodity option transactions, to commodity options subject to the trade option exemption. See 17 CFR 32.2, 32.4. --------------------------------------------------------------------------- In adopting Sec. 32.3, the Commission stated that the trade option exemption is generally intended to permit parties to hedge or otherwise enter into commodity option transactions for commercial purposes without being subject to the full Dodd-Frank swaps regime.\17\ This limited exemption continued the Commission's longstanding practice of providing commercial participants in trade options with relief from certain requirements that would otherwise apply to commodity options.\18\ --------------------------------------------------------------------------- \17\ See 77 FR at 25326, n.39. For example, trade options do not factor into the determination of whether a market participant is an SD or MSP; trade options are exempt from the rules on mandatory clearing; and trade options are exempt from the rules related to real-time reporting of swaps transactions. The provisions identified in this list are not intended to constitute an exclusive or exhaustive list of the swaps requirements from which trade options are exempt. \18\ See Regulation and Fraud in Connection with Commodity and Commodity Option Transactions, 41 FR 51808 (Nov. 24, 1976) (adopting an exemption from the general requirement that commodity options be traded on-exchange for commodity option transaction for certain transactions involving commercial parties); Suspension of the Offer and Sale of Commodity Options, 43 FR 16153, 16155 (Apr. 17, 1978) (adopting a rule suspending all trading in commodity options other than such exempt trade options); Trade Options on the Enumerated Agricultural Commodities, 63 FR 18821 (Apr. 16, 1998) (authorizing the off-exchange trading of trade options in agricultural commodities). --------------------------------------------------------------------------- The Commission further explained that the applicable conditions in Sec. 32.3(b)-(d) were primarily intended to preserve a level of visibility into the market for trade options while still reducing the regulatory compliance burden for trade option participants.\19\ The Commission invited market participants to comment on the trade option exemption, and provided a list of specific questions for commenters' consideration.\20\ --------------------------------------------------------------------------- \19\ See 77 FR at 25326-27. \20\ See 77 FR 25329-30. Comments were due on or before June 26, 2012. The comment file is available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1196. --------------------------------------------------------------------------- In the year following the Commission's adoption of the trade option exemption, the Commission's Division of Market Oversight (``DMO'') issued a series of no-action letters granting relief from certain conditions [[Page 26202]] in the trade option exemption.\21\ CFTC No-Action Letter No. 13-08 (``No-Action Letter 13-08''), which remains in effect, provides that DMO will not recommend that the Commission commence an enforcement action against a market participant that is not an SD or an MSP (a ``Non-SD/MSP'') for failing to comply with the part 45 reporting requirements, as required by Sec. 32.3(b)(1), provided that such Non- SD/MSP meets certain conditions, including reporting such exempt commodity option transactions via Form TO \22\ and notifying DMO no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year (the ``$1 Billion Notice'').\23\ --------------------------------------------------------------------------- \21\ See CFTC No-Action Letter No. 12-06 (Aug. 14, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-06.pdf; CFTC No-Action Letter No. 12-41 (Dec. 5, 2012), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-41.pdf; CFTC No-Action Letter No. 13-08 (Apr. 5, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf. \22\ See notes 28-29 and accompanying text, infra. \23\ No-Action Letter 13-08, at 3-4. No-Action Letter 13-08 also grants relief from certain swap recordkeeping requirements in part 45 for a Non-SD/MSP that complies with the recordkeeping requirements set forth in Sec. 45.2, provided that if the counterparty to the trade option at issue is an SD or an MSP, the Non-SD/MSP obtains a legal entity identifier (``LEI'') pursuant to Sec. 45.6. Id. at 4-5. Should the Commission adopt this proposal without significant revision, the relief provided in No-Action Letter 13-08 would be terminated. --------------------------------------------------------------------------- Based on DMO's experience with the trade option exemption following the issuance of No-Action Letter 13-08, and after a review of comments from market participants,\24\ the Commission is proposing several amendments to the trade option exemption in Sec. 32.3. Generally, these proposed amendments are intended to facilitate use of trade options by commercial market participants to hedge against commercial and physical risks. --------------------------------------------------------------------------- \24\ In addition to seeking comment following adoption of the trade option exemption itself, see supra note 21, the Commission has sought comment relating to the trade option exemption in connection with other related Commission actions. See e.g., Further Definition of ``Swap,'' Security-Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48207 (Aug. 13, 2012); Agency Information Collection Activities: Proposed Collection, Comment Request: Form TO, Annual Notice Filing for Counterparties to Unreported Trade Options, 77 FR 74647 (Dec. 17, 2012); Agency Information Collection Activities under OMB Review, 78 FR 11856 (Feb. 20, 2013); Forward Contracts With Embedded Volumetric Optionality, 79 FR 69073 (Nov. 20, 2014). CFTC staff also invited comment in connection with an April 2014 public roundtable regarding issues concerning end users and the Dodd-Frank Act. The Commission has reviewed these comment letters and taken into account any significant issues raised therein in issuing this proposal. The related comment files are available at http://comments.cftc.gov/PublicComments/ReleasesWithComments.aspx. --------------------------------------------------------------------------- The Commission is proposing modifications to the recordkeeping and reporting requirements in Sec. 32.3(b) that are applicable to trade option counterparties that are Non-SD/MSPs, as well as a non- substantive amendment to Sec. 32.3(c) to eliminate the reference to the now-vacated part 151 position limits requirements. These proposed amendments are generally intended to relax reporting and recordkeeping requirements where two commercial parties enter into trade options with each other in connection with their respective businesses while maintaining regulatory insight into the market for unreported trade options. The Commission requests comment on all aspects of its proposal. II. Explanation of the Proposed Rules A. Reporting Requirements for Non-SD/MSPs Pursuant to Sec. 32.3(b)(1), the determination as to whether a trade option must be reported pursuant to part 45 is based on the status of the parties to the trade option and whether or not they have previously reported swaps to an appropriate swap data repository (``SDR'') pursuant to part 45.\25\ If a trade option involves at least one counterparty (whether as buyer or seller) that has (1) become obligated to comply with the reporting requirements of part 45, (2) as a reporting party, (3) during the twelve month period preceding the date on which the trade option is entered into, (4) in connection with any non-trade option swap trading activity, then such trade option must also be reported pursuant to the reporting requirements of part 45. If only one counterparty to a trade option has previously complied with the part 45 reporting provisions, as described above, then that counterparty shall be the part 45 reporting counterparty for the trade option. If both counterparties have previously complied with the part 45 reporting provisions, as described above, then the part 45 rules for determining the reporting counterparty will apply.\26\ --------------------------------------------------------------------------- \25\ See 17 CFR 32.3(b)(1). \26\ See 17 CFR 45.8. As discussed above, No-Action Letter 13-08 provides non-time-limited, conditional no-action relief for Non-SD/ MSP counterparties to trade options from part 45 reporting requirements. See supra note 22 and accompanying text. --------------------------------------------------------------------------- To the extent that neither counterparty to a trade option has previously submitted reports to an SDR as a result of its swap trading activities as described above, then such trade option is not required to be reported pursuant to part 45. Instead, Sec. 32.3(b)(2) requires that each counterparty to an otherwise unreported trade option (i.e., a trade option that is not required to be reported to an SDR by either counterparty pursuant to Sec. 32.3(b)(1) and part 45) complete and submit to the Commission an annual Form TO filing providing notice that the counterparty has entered into one or more unreported trade options during the prior calendar year.\27\ Form TO requires an unreported trade option counterparty to: (1) Provide its name and contact information; (2) identify the categories of commodities (agricultural, metals, energy, or other) underlying one or more unreported trade options which it entered into during the prior calendar year; and (3) for each commodity category, identify the approximate aggregate value of the underlying physical commodities that it either delivered or received in connection with the exercise of unreported trade options during the prior calendar year. Counterparties to otherwise unreported trade options must submit a Form TO filing by March 1 following the end of any calendar year during which they entered into one or more unreported trade options.\28\ In adopting Sec. 32.3, the Commission stated that Form TO was intended to provide the Commission with a level of visibility into the market for unreported trade options that is ``minimally intrusive,'' thereby allowing it to identify market participants from whom it should collect additional information, or whom it should subject to additional reporting obligations in the future.\29\ --------------------------------------------------------------------------- \27\ Form TO is set out in appendix A to part 32 of the Commission's regulations. \28\ In 2014, approximately 330 Non-SD/MSPs submitted Form TO filings to the Commission, approximately 200 of which indicated delivering or receiving less than $10 million worth of physical commodities in connection with exercising unreported trade options in 2013. \29\ See 77 FR at 25327-28. --------------------------------------------------------------------------- Commenters have generally expressed the opinion that the reporting requirements in Sec. 32.3(b) are overly burdensome for Non-SD/MSPs. Commenters have argued that these costs have discouraged commercial end users from entering into trade options to meet their commercial and risk management needs, thereby reducing liquidity and raising prices.\30\ --------------------------------------------------------------------------- \30\ See American Gas Association (``AGA'') (Dec. 22, 2013) at 3, 16-17 (observing that ``widespread concern'' regarding the regulatory risk posed by Form TO has led some counterparties to avoid entering into trade options, leading to a rise in the cost of contracting); American Public Power Association, National Rural Electric Cooperative Association, Edison Electric Institute, Electric Power Supply Association (``APPA/NRECA/EEI/EPSA'') (Feb. 15, 2013) at 7-8 (stating that Sec. 32.3(b)'s application of the part 45 reporting requirement ``imposes a regulatory burden on the non-SD/MSP and may discourage parties from entering into any ``swaps'' for which it is a reporting party, and from entering into nonfinancial commodity option hedging transactions with parties that are not SD/MSPs.''). --------------------------------------------------------------------------- [[Page 26203]] With respect to the part 45 reporting requirements, commenters have noted that Non-SD/MSPs may be required to comply with part 45 solely on the basis of the ``unusual circumstance'' of having had to report a single historical or inter-affiliate swap during the same twelve-month period.\31\ Commenters have further noted that Non-SD/MSPs may not have the infrastructure in place to support part 45 reporting to an SDR and that instituting such infrastructure would impose a costly burden, particularly for small end users.\32\ --------------------------------------------------------------------------- \31\ See International Energy Credit Association (``IECA'') (Feb. 15, 2013) at 3; AGA (June 26, 2012) at 8; APPA/NRECA/EEI/EPSA (June 26, 2012) at 7-8; Coalition of Physical Energy Companies (``COPE'') (June 25, 2012) at 9; Commercial Energy Working Group (``CEWG'') (Jun 26, 2012) at 4. \32\ See, e.g., APPA/NRECA/EEI/EPSA (Feb. 15, 2013) at 2 (stating that only SDs and MSPs should be required to report trade options under part 45 out of concern that part 45 would impose an ``increased regulatory burden, particularly for small entities''); IECA (Feb. 15, 2013) at 2-3 (stating that, for Non-SD/MSPs, the burden of reporting trade options under part 45 would be ``extremely onerous, if not a practical impossibility''); AGA (June 26, 2012) at 9 (recommending that the part 45 reporting requirements not apply to Non-SD/MSPs with respect to their trade option transactions). --------------------------------------------------------------------------- With respect to Form TO reporting, commenters have argued that it is costly and burdensome for Non-SD/MSPs, particularly for small end users, to track, calculate and assemble the requisite data. Commenters have explained that the systems and processes used by many Non-SD/MSPs to create, store, and track their trade options are separate and distinct from their financial systems and are typically not designed to track the kind of information required by Form TO.\33\ Recent comments offer specific monetary estimates that suggest the costs involved with preparing the Form TO filing may be significant.\34\ --------------------------------------------------------------------------- \33\ See, e.g., CEWG (Feb. 6, 2013) at 1 (``Unlike systems designed to capture and report data for financial transactions, physical systems are primarily designed to manage logistics related to deliveries and inventory quantities at trade locations. Some physical systems of record do not contain market price information, execution venues, or other option characteristics, such as premiums and strike prices, which make reporting under Part 45 additionally challenging.''). See also Coalition for Derivative End Users (``Coalition'') (Dec. 22, 2014) at 10; Commercial Energy Working Group and Commodity Markets Council (``CEWG/CMC'') (Dec. 22, 2014) at 5; ICEA (Dec. 22, 2012) at 9; American Public Power Association, National Rural Electric Cooperative Association, Large Public Power Council (``APPA/NRECA/LPPC'') (Apr. 17, 2014) at 4; AGA (June 26, 2012) at 7. \34\ See American Public Power Association, National Rural Electric Cooperative Association, Edison Electric Institute, Electric Power Supply Association, Large Public Power Council (``APPA/NRECA/EEI/EPSA/LPPC'') (Dec. 22, 2014) at 9 (stating that one of its members spent more than $100,000 in information technology costs to implement a mechanism to track exercises of nonfinancial commodity options); IECA (Dec. 22, 2014) at 8 (estimating, based on its survey of market participants, that completing Form TO and complying with No-Action Letter 13-08 requires 80 minutes per contract); Southern Company Services, Inc., acting on behalf of and as agent for Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company (``Southern'') at 8-9 (estimating that, for Southern, two full-time employees require 30 minutes to two hours per contract to complete Form TO, at an average cost of $200 per contract and a total annual cost of about $12,000); Transcript of Staff End-User Roundtable (James Allison, ConocoPhillips) at 161 (estimating the marginal cost of Form TO is ``on the order of'' one full-time employee and possibly higher for smaller entities with less in the way of compliance systems and procedures), transcript available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/transcript040314.pdf. --------------------------------------------------------------------------- 1. Proposed Action: Eliminate Part 45 Reporting for Non-SD/MSPs As discussed above, Commission regulation Sec. 32.3(b)(1) requires that a Non-SD/MSP counterparty to a trade option that has become obligated to report a non-trade option swap within the past calendar year must comply with part 45 reporting requirements. The Commission proposes to amend Sec. 32.3(b) such that a Non-SD/MSP will under no circumstances be subject to part 45 reporting requirements with respect to its trade option activities.\35\ This amendment is intended to reduce burdens for Non-SD/MSP trade option counterparties, many of whom, as commenters explained, face technical and logistical impediments that prevent timely compliance with part 45 reporting requirements. --------------------------------------------------------------------------- \35\ Note that trade option counterparties that are SD/MSPs would continue to comply with the swap data reporting requirements of part 45, including where the counterparty is a Non-SD/MSP, as they would in connection with any other swap. See 17 CFR 32.3(b)(4). --------------------------------------------------------------------------- 2. Proposed Action: Eliminate the Form TO Notice Filing Requirement The Commission proposes to amend Commission regulation Sec. 32.3(b) such that a Non-SD/MSP would not be required to report otherwise unreported trade options on Form TO. The Commission further proposes to delete Form TO from appendix A to part 32. These amendments are intended to reduce reporting burdens for Non-SD/MSP trade option counterparties, which, commenters have explained, may face significant costs in preparing Form TO. The Commission preliminarily believes that there are surveillance benefits from Form TO data but recognizes that completing Form TO imposes costs and burdens on Non-SD/MSPs, especially small end users. Moreover, Non-SD/MSPs would, under the proposal, remain subject, via Sec. 32.3(b), to the recordkeeping requirements in Sec. 45.2, which require market participants to maintain full and complete records and to open their records to inspection upon the Commission's request.\36\ Consequently, the Commission would remain able to collect additional information concerning unreported trade options as necessary to fulfill its regulatory mission.\37\ --------------------------------------------------------------------------- \36\ See 17 CFR 45.2(b), 45.2(h). As discussed infra at notes 53-55 and accompanying text, the Commission proposes to maintain recordkeeping requirements in Sec. 32.3(b)-(c) for trade option participants, subject to certain clarifying amendments. \37\ See 17 CFR 1.31(a)(2), 45.2(h). --------------------------------------------------------------------------- 3. Proposed Action: New $1 Billion Notice Provision for Non-SD/MSPs The Commission proposes to amend Sec. 32.3(b) by adding a requirement that Non-SD/MSP trade option counterparties must provide notice by email to DMO within 30 days after entering into trade options, whether reported or unreported, that have an aggregate notional value in excess of $1 billion in any calendar year (the ``1 Billion Notice'').\38\ In the alternative, a Non-SD/MSP may provide notice by email to DMO that it reasonably expects to enter into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year (the ``Alternative Notice'').\39\ --------------------------------------------------------------------------- \38\ As discussed above, the no-action relief provided by No- Action Letter 13-08 to Non-SD/MSP trade option counterparties from part 45 reporting requirements is also conditioned on the Non-SD/MSP providing DMO with a $1 Billion Notice. See supra note 24 and accompanying text. In 2013 and 2014, DMO received $1 Billion Notices from nine and sixteen Non-SD/MSPs, respectively. Most of these $1 Billion Notices were filed on behalf of large energy companies. \39\ Non-SD/MSPs who provide the Alternative Notice would not be required to demonstrate that they actually entered into trade options with an aggregate notional value of $1 billion or more in the applicable calendar year. Collectively, the $1 Billion Notice and the Alternative Notice are referred to as the ``Notice Requirement.'' --------------------------------------------------------------------------- For purposes of the proposed Notice Requirement, the aggregate notional value of trade options entered into, or expected to be entered into, should be calculated by multiplying (1) the maximum volume of the commodities that could be bought or sold pursuant to the trade options entered into by (2) the strike or exercise price per unit of the commodity. If the strike or exercise price is not a fixed number in the trade option agreement and, instead, is to be determined pursuant to a reference price source that is not determinable at the time the trade option is entered into, [[Page 26204]] then the foregoing calculation should be based on a current market price of the reference commodity at the time the option is entered into. For example, if the trade option involves crude oil that is deliverable on, or similar to, crude oil that is deliverable on the New York Mercantile Exchange (``NYMEX''), then the price of the nearby NYMEX crude oil futures contract may be used as the market price of the commodity at the time the trade option is entered into.\40\ --------------------------------------------------------------------------- \40\ The forgoing guidance with regard to how to calculate the notional value of trade options is similar to that provided in No- Action Letter 13-08 but has been revised to clarify that the focus of the $1 Billion Notice is the value of the trade option at time of contract initiation, not at exercise. --------------------------------------------------------------------------- In light of the other proposed amendments that would generally remove reporting requirements for Non-SD/MSP counterparties to trade options, the proposed Notice Requirement would provide the Commission insight into the size of the market for unreported trade options and the identities of the most significant market participants. Additionally, the proposed Notice Requirement would help guide the Commission's efforts to collect additional information through its authority to obtain copies of books or records required to be kept pursuant to the CEA and the Commission's regulations should market circumstances dictate.\41\ --------------------------------------------------------------------------- \41\ See supra note 38 and accompanying text. --------------------------------------------------------------------------- B. Recordkeeping requirements for Non-SD/MSPs Commission regulation Sec. 32.3(b) provides that in connection with any commodity option transaction that is eligible for the trade option exemption, every counterparty shall comply with the swap data recordkeeping requirements of part 45, as otherwise applicable to any swap transaction.\42\ In discussing the trade option exemption conditions, however, the Commission noted in the preamble to the Commodity Options Release that ``[t]hese conditions include a recordkeeping requirement for any trade option activity, i.e., the recordkeeping requirements of 17 CFR 45.2,'' and did not reference or discuss any other provision of part 45 that contains recordkeeping requirements.\43\ --------------------------------------------------------------------------- \42\ See 17 CFR 32.3(b). \43\ See 77 FR at 25327. --------------------------------------------------------------------------- Pursuant to Commission regulation Sec. 45.2, records must be maintained by all trade option participants and made available to the Commission as specified therein.\44\ However, Sec. 45.2 applies different recordkeeping requirements, depending on the nature of the counterparty. For example, if a trade option counterparty is an SD/MSP, it would be subject to the recordkeeping provisions of Sec. 45.2(a). If a counterparty is a Non-SD/MSP, it would be subject to the less stringent recordkeeping requirements of Sec. 45.2(b).\45\ In adopting Sec. 32.3(b), the Commission stated that the recordkeeping condition was intended to ensure that trade option participants are able to provide pertinent information regarding their trade options activity to the Commission, if requested.\46\ --------------------------------------------------------------------------- \44\ 17 CFR 32.3(b); 45.2(h). \45\ In the case of Non-SD/MSPs, the primary recordkeeping requirements are set out in Sec. 45.2(b), which essentially requires keeping basic business records--i.e., ``full, complete and systematic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty.'' Non- SD/MSPs are also subject to the other general recordkeeping requirements of Sec. 45.2, such as the requirement that records must be maintained for 5 years and must be retrievable within 5 days. See 17 CFR 45.2(b). \46\ See 77 FR at 25327. --------------------------------------------------------------------------- Additional recordkeeping requirements in part 45, separate and apart from those specified in Sec. 45.2 and which would apply to all trade option counterparties by operation of Sec. 32.3(b) include: \47\ --------------------------------------------------------------------------- \47\ As discussed above, No-Action Letter 13-08 provides no- action relief from certain swap recordkeeping requirements in part 45 for a Non-SD/MSP that complies with the recordkeeping requirements set forth in Sec. 45.2, provided that if the counterparty to the trade option at issue is an SD or an MSP, the Non-SD/MSP obtains an LEI pursuant to Sec. 45.6 and also provides DMO with a $1 Billion Notice. See supra note 24 and accompanying text. --------------------------------------------------------------------------- each swap must be identified in all recordkeeping by the use of a unique swap identifier (``USI''); \48\ --------------------------------------------------------------------------- \48\ 17 CFR 45.5. --------------------------------------------------------------------------- each counterparty to any swap must be identified in all recordkeeping by means of a single LEI; \49\ and --------------------------------------------------------------------------- \49\ Each counterparty to any swap subject to the Commission's jurisdiction must be identified in all recordkeeping and all swap data reporting pursuant to part 45 by means of a single LEI as specified in Sec. 45.6. See 17 CFR 45.6. --------------------------------------------------------------------------- each swap must be identified in all recordkeeping by means of a unique product identifier (``UPI'') and product classification system.\50\ --------------------------------------------------------------------------- \50\ 17 CFR 45.7. --------------------------------------------------------------------------- 1. Proposed Action: Modify the Recordkeeping Requirements for Non-SD/ MSPs The Commission proposes to amend Sec. 32.3(b) to clarify that trade option counterparties that are Non-SD/MSPs need not identify their trade options in all recordkeeping by means of either a USI or UPI, as required by Sec. Sec. 45.5 and 45.7.\51\ Rather, with respect to part 45 recordkeeping requirements, trade option counterparties that are Non-SD/MSPs must only comply with the applicable recordkeeping provisions in Sec. 45.2,\52\ with the following qualification: The Non-SD/MSP trade option counterparty must obtain an LEI pursuant to Sec. 45.6 and provide such LEI to its counterparty if that counterparty is an SD/MSP.\53\ --------------------------------------------------------------------------- \51\ See supra notes 49 and 49 and accompanying text. \52\ Trade option counterparties that are SD/MSPs would continue to comply with the swap data recordkeeping requirements of part 45, as they would in connection with any other swap. See 17 CFR 32.3(b)(4). \53\ For the avoidance of doubt, Non-SD/MSPs would not otherwise be required to comply with Sec. 45.6. --------------------------------------------------------------------------- These amendments are intended to reduce recordkeeping burdens for Non-SD/MSP trade option counterparties, while allowing a trade option counterparty that is an SD/MSP to comply with applicable part 45 reporting obligations by properly identifying its Non-SD/MSP trade option counterparty by that counterparty's LEI in all recordkeeping as well as all swap data reporting, just as the SD/MSP would for any other swap.\54\ --------------------------------------------------------------------------- \54\ An SD/MSP that otherwise would report the trade option at issue pursuant to Sec. 32.3(b)(1) is required to identify its counterparty to the trade option by that counterparty's LEI in all recordkeeping as well as all swap data reporting. See, e.g., 17 CFR 23.201, 23.204, and 45.6. See supra note 36 and 17 CFR 45.6. --------------------------------------------------------------------------- C. Non-substantive amendment to Commission regulation Sec. 32.3(c) Commission regulation Sec. 32.3(c)(2) subjects trade options to part 151 position limits, to the same extent that part 151 would apply in connection with any other swap.\55\ However, as stated above, part 151 has been vacated.\56\ Furthermore, trade options are not subject to position limits under the Commission's current part 150 position limit regime.\57\ --------------------------------------------------------------------------- \55\ See 17 CFR 32.3(c)(2). \56\ See supra note 13 and accompanying text. \57\ Under current Sec. 150.2, position limits apply to agricultural futures in nine listed commodities and options on those futures. Since trade options are not options on futures, Sec. 150.2 position limits do not currently apply to such transactions. See 17 CFR 150.2. --------------------------------------------------------------------------- Therefore, since position limits do not currently apply to trade options, the Commission proposes to amend Sec. 32.3(c) by deleting Sec. 32.3(c)(2), including the reference to vacated part 151. This would not be a substantive change. Although commenters have requested assurance that position limits will not apply to trade options in the future,\58\ the Commission preliminarily believes that any future application of [[Page 26205]] position limits would be best addressed in the context of the pending position limits rulemaking, which remains in the proposed rulemaking stage.\59\ --------------------------------------------------------------------------- \58\ See, e.g., Coalition (Dec. 22, 2014) at 11; AGA (Apr. 17, 2014) at 4; IECA (Apr. 17. 2014) at 28; Intercontinental Exchange, Inc. (April 17, 2014) at 5; CEWG (Feb. 6, 2013) at 3; COPE (June 26, 2012) at 6. \59\ On December 12, 2013, the Commission published in the Federal Register a notice of proposed rulemaking to establish speculative position limits for 28 exempt and agricultural commodity futures and options contracts and the physical commodity swaps that are economically equivalent to such contracts, including trade options. See Position Limits for Derivatives, Proposed Rules, 78 FR 75680 (Dec. 12, 2013) (``Position Limits Proposal''). Therein, the Commission proposed replacing the cross-reference to vacated part 151 in Sec. 32.3(c)(2) with a cross-reference to amended part 150 position limits. See 78 FR at 75711. As an alternative in the Position Limits Proposal, the Commission proposed to exclude trade options from speculative position limits and proposed an exemption for commodity derivative contracts that offset the risk of trade options. Also note that under the Position Limits Proposal, trade options based on commodities or delivery points other than those underlying the core referenced futures contracts specified in the Position Limits Proposal would not be subject to speculative position limits. The Commission recently extended the comment period for the Position Limits Proposal until March 28, 2015. See 80 FR 10022 (Feb. 25, 2015). --------------------------------------------------------------------------- III. Related Matters A. Cost Benefit Analysis 1. Background As discussed above, the Commission is proposing amendments to the trade option exemption in Sec. 32.3 that would: (1) Eliminate the part 45 reporting requirement for Non-SD/MSPs; (2) eliminate the Form TO filing requirement; (3) require those Non-SD/MSPs that have the most significant volume in trade options to provide DMO with either (i) the $1 Billion Notice or (ii) the Alternate Notice; and (4) clarify that Non-SD/MSPs are required to comply with the swap data recordkeeping requirements of Sec. 45.2 only, as opposed to all part 45 recordkeeping requirements; (5) require Non-SD/MSPs that enter into exempt trade options with SD/MSPs to obtain an LEI pursuant to Sec. 45.6 and provide it to their SD/MSP counterparties; (6) eliminate reference to the now-vacated part 151 position limits.\60\ In issuing this proposal, the Commission has reviewed all relevant comment letters and taken into account significant issues raised therein.\61\ --------------------------------------------------------------------------- \60\ As stated above, Non-SD/MSPs would not otherwise be required to comply with Sec. 45.6. \61\ See supra note 24. See also note 59 (stating that the Commission has determined to address the application of position limits to trade options in the pending position limits rulemaking). --------------------------------------------------------------------------- The Commission believes that the baseline for this cost and benefit consideration is existing Sec. 32.3. Although No-Action Letter 13-08, as discussed above, currently offers no-action relief that is substantially similar to the relief that the proposed amendments would grant certain market participants and end users, as a no-action letter, it only represents the position of the issuing Division or Office and cannot bind the Commission or other Commission staff.\62\ Consequently, the Commission believes that No-Action Letter 13-08 should not set or affect the baseline against which the Commission considers the costs and benefits of the proposal. --------------------------------------------------------------------------- \62\ See 17 CFR 140.99(a)(2). See also No-Action Letter 13-08 at 5. --------------------------------------------------------------------------- 2. Costs The Commission believes that the proposal would, overall, reduce the regulatory burdens and associated costs imposed by the conditions for relief in Sec. 32.3(b). Although the Commission understands that some Non-SD/MSPs may experience costs associated with tracking the aggregate notional value of their trade option transactions for purposes of the $1 Billion Notice,\63\ Non-SD/MSPs that reasonably expect to enter into trade options in excess of $1 billion could opt to avoid those tracking costs by instead submitting the Alternative Notice. The Commission also believes that many Non-SD/MSPs may avoid any costs associated with the $1 Billion Notice because they would fall significantly below the $1 billion threshold and thus would not need to track and calculate their aggregate trade option activity.\64\ Furthermore, the Commission believes that the proposal would otherwise significantly reduce the regulatory burdens imposed by Sec. 32.3(b), particularly through the elimination of part 45 reporting requirements for trade option counterparties that are Non-SD/MSPs and the Form TO filing requirement, each of which commenters have described as burdensome.\65\ The Commission preliminarily believes that the proposal would not impose any additional costs on any other market participants, the markets themselves, or the general public. The Commission invites comment regarding the nature and extent of these and any other costs that could result from adoption of the proposal and, to the extent they can be quantified, monetary and other estimates thereof. --------------------------------------------------------------------------- \63\ See Coalition for Derivatives End-Users (Dec. 22, 2014) at 10; American Public Power Association, Edison Electric Institute, Electric Power Supply Association, Large Public Power Council, National Rural Electric Cooperative Association (Dec. 22, 2014) at 9. \64\ As stated in note 38, supra, of the 330 Non-SD/MSPs who submitted Form TO filings in 2014, only sixteen also submitted a $1 Billion Notice to DMO. \65\ See supra note 34 (citing recent comment letters offering costs estimates for compliance with the Form TO reporting requirement). --------------------------------------------------------------------------- 3. Benefits The Commission believes that the proposal would provide relief for Non-SD/MSPs entering into trade options by eliminating the part 45 and Form TO reporting obligations. The Commission believes that the proposed Notice Requirement would also support the regulatory goals of ensuring market integrity and protecting the public by allowing the Commission insight into the size of the market for unreported trade options and the ability to identify significant market participants, who the Commission may wish to contact if concerns about the market for trade options arise. The Commission invites comment regarding the nature and extent of these and any other benefits that could result from adoption of the proposal--including benefits to other market participants, the market itself or the general public--and, to the extent they can be quantified, monetary and other estimates thereof. 4. Section 15(a) Factors Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its actions before promulgating a regulation under the CEA or issuing certain orders.\66\ Section 15(a) further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission considers the costs and benefits resulting from its discretionary determinations with respect to the section 15(a) factors. --------------------------------------------------------------------------- \66\ 7 U.S.C. 19(a). --------------------------------------------------------------------------- a. Protection of Market Participants and the Public The Commission recognizes that there may be trade-offs between reducing regulatory burdens and ensuring that the Commission has sufficient information to fulfill its regulatory mission. The proposed amendments to Sec. 32.3 are intended to reduce some of the regulatory burdens on end users while still maintaining insight into the market for trade options to protect the public. [[Page 26206]] b. Efficiency, Competitiveness, and Financial Integrity of Markets The Commission believes that the proposed amendments to Sec. 32.3 could increase efficiency for participants in the market for trade options by reducing the reporting burdens on Non-SD/MSPs, allowing them to reallocate those resources to other more efficient purposes. The Commission also believes that the proposed Notice Requirement would promote market integrity by providing the Commission with information to use in its market oversight role, thereby fulfilling the purposes of the CEA.\67\ The Commission preliminarily believes that the proposed amendments to Sec. 32.3 will not have any competitiveness impact. --------------------------------------------------------------------------- \67\ See, e.g., CEA section 3(b), 7 U.S.C. 5 (stating that it is a purpose of the CEA to deter disruptions to market integrity). --------------------------------------------------------------------------- c. Price Discovery The Commission preliminarily believes that the proposed amendments to Sec. 32.3 would likely not have a significant impact on price discovery. Given that trade options are not subject to the real-time reporting requirements applicable to other swaps, meaning that current prices of consummated trade options are likely not available to many market participants, the Commission preliminarily believes any effect on price discovery would be negligible. d. Sound Risk Management Practices The Commission preliminarily believes that the proposed amendments would not have a meaningful effect on the risk management practices of the affected market participants and end users. Although the proposal is intended, in part, to reduce some of the regulatory burdens on certain market participants and end users, affected Non-SD/MSPs would still be required to maintain complete and accurate records in a manner that is readily available for production to regulators. e. Other Public Interest Considerations The Commission has not identified any other public interest considerations for this rulemaking. 5. Request for Comment The Commission invites comment on all aspects of its preliminary consideration of the costs and benefits associated with the proposal and the five factors the Commission is required to consider under CEA section 15(a). In addressing these areas and any other aspect of the Commissions preliminary cost-benefit considerations, the Commission encourages commenters to submit any data or other information they may have quantifying and/or qualifying the costs and benefits of the proposal. B. Regulatory Flexibility Analysis The Regulatory Flexibility Act (the ``RFA'') \68\ requires that Federal agencies consider whether the rules they propose will have a significant economic impact on a substantial number of ``small entities'' \69\ and, if so, the agencies must provide a regulatory flexibility analysis reflecting the impact. Whenever an agency publishes a general notice of proposed rulemaking for any rule, pursuant to the notice-and-comment provisions of the Administrative Procedure Act,\70\ a regulatory flexibility analysis or certification typically is required.\71\ --------------------------------------------------------------------------- \68\ 5 U.S.C. 601 et seq. \69\ See 5 U.S.C. 601(6) (defining ``small entity'' to include a ``small business,'' ``small organization,'' and ``small governmental jurisdiction,'' as those terms are defined in the RFA and by reference to the Small Business Act, 15 U.S.C. 632 et seq.). \70\ 5 U.S.C. 553. The Administrative Procedure Act is found at 5 U.S.C. 551 et seq. \71\ See 5 U.S.C. 601(2), 603-605. --------------------------------------------------------------------------- As discussed above, the proposed amendments would affect the recordkeeping and reporting requirements for Non-SD/MSP counterparties relying on the trade option exemption in Sec. 32.3. Pursuant to the eligibility requirements in Sec. 32.3(a), such a Non-SD/MSP may be an ECP and/or a commercial party (i.e., a producer, processor, or commercial user of, or a merchant handling the exempt or agricultural commodity that is the subject of the commodity option transaction, or the products or by-products thereof) offering or entering into the trade option solely for purposes related to its business as such. Although the Commission has previously determined that ECPs are not small entities for RFA purposes,\72\ the Commission is not in a position to determine whether non-ECP commercial parties affected by the amendments would include a substantial number of small entities on which the rule would have a significant economic impact because Sec. 32.3 does not subject such entities to a minimum net worth requirement, allowing commercial entities of any economic status to enter into exempt trade options. Therefore, pursuant to 5 U.S.C. 603, the Commission offers for public comment this initial regulatory flexibility analysis addressing the impact of the proposal on small entities: --------------------------------------------------------------------------- \72\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 2001). --------------------------------------------------------------------------- 1. A description of the reasons why action by the agency is being considered. The Commission is proposing to modify the trade option exemption in Sec. 32.3 in response to comments from Non-SD/MSPs that the regulatory burdens currently imposed by Sec. 32.3 are unnecessarily burdensome. 2. A succinct statement of the objectives of, and legal basis for, the proposal. The objective of the proposal is to reduce the recordkeeping and reporting obligations for Non-SD/MSPs while still providing the Commission insight into the size of the market for unreported trade options and the identities of the most significant participants in the market. As stated above, the legal basis for the proposed rule is the Commission's plenary options authority in CEA section 4c(b). 3. A description of and, where feasible, an estimate of the number of small entities to which the proposed rule will apply. The small entities to which the proposed amendments may apply are those commercial parties that would not qualify as ECPs and/or that fall within the definition of a ``small entity'' under the RFA, including size standards established by the Small Business Administration.\73\ Although more than 300 Non-SD/MSPs have reported their use of trade options to the Commission through Form TO, the limited information provided by Form TO is not sufficient for the Commission to determine whether and how many of those Non-SD/MSPs qualify as small entities under the RFA. --------------------------------------------------------------------------- \73\ See id. See also 5 U.S.C. 601(3) (defining ``small business'' to have the same meaning as the term ``small business concern'' in the Small Business Act); 15 U.S.C. 632(a)(1) (defining ``small business concern'' to include an agricultural enterprise with annual receipts not in excess of $750,000); 13 CFR 121.201 (establishing size standards for small business concerns). --------------------------------------------------------------------------- 4. A description of the projected reporting, recordkeeping, and other compliance requirements of the rule, including an estimate of the classes of small entities which will be subject to the requirement and the type of professional skills necessary for preparation of the report or record. The proposed amendments would relieve Non-SD/MSPs, which may include small entities, from certain recordkeeping and reporting requirements that would otherwise apply to them. While the proposal would impose a new requirement on certain Non-SD/MSPs to provide DMO by email with either the $1 Billion Notice or the Alternative Notice [[Page 26207]] annually, the Commission does not believe that this requirement would impact many small entities, if any at all. Given the significant volume of trade options required to trigger the proposed Notice Requirement, the Commission expects that it would apply to only a small number of entities and that such entities would likely not be small entities.\74\ The Commission's view is supported by DMO's experience with the $1 Billion Notice provision in No-Action Letter 13-08: As indicated above, DMO received a $1 Billion Notice from only sixteen of the more than 300 Non-SD/MSPs that filed a Form TO in 2014, and all such entities are generally well-known in their respective industries.\75\ --------------------------------------------------------------------------- \74\ See 15 U.S.C. 632(a) (defining a ``small business concern'' generally to include an enterprise that is ``not dominant in its field of operation''). \75\ See supra note 37 and accompanying text. --------------------------------------------------------------------------- Filing the $1 Billion Notice would require affected Non-SD/MSPs to track and aggregate the notional values of their trade options. The Commission expects that this general information should be readily compiled and aggregated using a spreadsheet or other existing software and would not require any professional skills beyond those typically held by any commercial party. Furthermore, Non-SD/MSPs that reasonably expect to enter into trade options with an aggregate notional value in excess of $1 billion during the calendar year may, in line with the Alternative Notice, simply send an email to DMO to that effect, thereby avoiding having to track the notional values of their trade options. 5. An identification, to the extent practicable, of all relevant Federal rules which may duplicate, overlap or conflict with the rule. The Commission is unaware of any Federal rules that could duplicate, overlap, or conflict with the proposal. 6. A description of any significant alternatives to the proposed rule which accomplish the stated objectives of applicable statutes and which minimize any significant economic impact of the proposed rule on small entities. These may include, for example, (1) the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation, or simplification of compliance and reporting requirements under the rule for such small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rule, or any part thereof, for such small entities. A potential alternative to relieving Non-SD/MSPs, which may include small entities, from certain recordkeeping and reporting requirements would be to either (1) not amend the current rule, which would maintain recordkeeping and reporting requirements that Non-SD/MSPs have represented are onerous, or (2) create a rule with more specific reporting parameters for specific entities. While the proposal would impose the new annual Notice Requirement on certain Non-SD/MSPs, overall, the Commission believes that the proposed amendments would have a positive economic impact on Non-SD/MSPs that are small entities because they would generally relax reporting requirements across all trade option counterparties that are Non-SD/MSPs. Although the proposal could expressly limit application of the Notice Requirement to entities that do not meet the RFA definition of a small entity, the Commission does not believe that is necessary because, as stated above, the Commission does not expect many small entities to be affected by that requirement, if any at all. Furthermore, even if a small entity were to enter into trade options with an aggregate notional value in excess of $1 billion during a calendar year, the Commission believes that such information would nevertheless be important to the Commission's insight into the market for otherwise unreported trade options and may cause the Commission to adjust the threshold for notice reporting above $1 billion. C. Paperwork Reduction Act The purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. (``PRA'') are, among other things, to minimize the paperwork burden to the private sector, ensure that any collection of information by a government agency is put to the greatest possible uses, and minimize duplicative information collections across the government.\76\ The PRA applies to all information, ``regardless of form or format,'' whenever the government is ``obtaining, causing to be obtained [or] soliciting'' information, and includes required ``disclosure to third parties or the public, of facts or opinions,'' when the information collection calls for ``answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons.'' \77\ The PRA requirements have been determined to include not only mandatory but also voluntary information collections, and include both written and oral communications.\78\ Under the PRA, an agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number from the Office of Management and Budget (``OMB''). The Commission seeks to amend the OMB control number 3038- 0106--Form TO, Annual Notice Filing for Counterparties to Unreported Trade Option. Therefore the Commission is submitting this proposal to OMB for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. --------------------------------------------------------------------------- \76\ See 44 U.S.C. 3501. \77\ See 44 U.S.C. 3502. \78\ See 5 CFR 1320.3(c)(1). --------------------------------------------------------------------------- With the exception of the proposed Notice Requirement, the Commission believes that these proposed rules will not impose any new information collection requirements that require approval of OMB under the PRA. As a general matter, the proposed rules would relax reporting and recordkeeping requirements for Non-SD/MSPs entering into trade options with each other in connection with their respective businesses, including the withdrawal and removal of Form TO. As such, the proposed rules will not result in the creation of any new information collection subject to OMB review or approval under the PRA, except for the annual Notice Requirement. Therefore, these proposed rules do not, by themselves, impose any new information collection requirements other than those that already exist in connection with trade options pursuant to part 32 of the Commission's regulations, except for the proposed Notice Requirement. As noted above, the Commission proposes to add the Notice Requirement for trade option counterparties that are Non-SD/MSPs, which requirement is considered to be a collection of information within the meaning of the PRA. Accordingly, the Commission is amending OMB control number 3038-0106 and submitting to OMB an information collection request for review and approval. If approved, this new collection of information will be mandatory. The Commission anticipates that affected Non-SD/MSPs may incur certain costs in complying with the proposed $1 Billion Notice, including those related to calculating the aggregate notional value of trade options entered into, and to drafting the notice email and submitting it to DMO. There are no additional capital costs associated with this collection because all respondents are already required to create and store detailed records of their trade option transactions pursuant to Sec. 32.3(b). The [[Page 26208]] Commission estimates that twenty respondents will file a total of one response each annually, and the estimated average number of hours per response would be two. Therefore, the Commission estimates the total burden hours associated with OMB control number 3038-0106 to be 40 hours. The Commission notes that the proposed amendments would relieve trade option counterparties that are Non-SD/MSPs from certain recordkeeping and reporting requirements under part 45. The Commission believes that these proposed amendments would not cause a material net reduction in the current part 45 PRA burden estimates (OMB control number 3038-0096) to the extent that such reduced recordkeeping and reporting burdens for trade option counterparties that are Non-SD/MSPs would be insubstantial when compared to the overall part 45 PRA burden estimate as it relates to Non-SD/MSPs. The Commission specifically invites public comment on the accuracy of its estimate that no additional information collection requirements or changes to existing collection requirements, other than the proposed Notice Requirement, would result from the proposal. List of Subjects in 17 CFR Part 32 Commodity futures, consumer protection, fraud, reporting and recordkeeping requirements. For the reasons stated in the preamble, the Commodity Futures Trading Commission proposes to amend 17 CFR part 32 as set forth below: PART 32--REGULATION OF COMMODITY OPTION TRANSACTIONS 0 1. The authority citation for part 32 continues to read as follows: Authority: 7 U.S.C. 1a, 2, 6c, and 12a, unless otherwise noted. 0 2. Revise Sec. 32.3 to read as follows: Sec. 32.3 Trade options. (a) Subject to paragraphs (b), (c), and (d) of this section, the provisions of the Act, including any Commission rule, regulation, or order thereunder, otherwise applicable to any other swap shall not apply to, and any person or group of persons may offer to enter into, enter into, confirm the execution of, maintain a position in, or otherwise conduct activity related to, any transaction in interstate commerce that is a commodity option transaction, provided that: (1) Such commodity option transaction must be offered by a person that has a reasonable basis to believe that the transaction is offered to an offeree as described in paragraph (a)(2) of this section. In addition, the offeror must be either: (i) An eligible contract participant, as defined in section 1a(18) of the Act, as further jointly defined or interpreted by the Commission and the Securities and Exchange Commission or expanded by the Commission pursuant to section 1a(18)(C) of the Act; or (ii) A producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity option transaction, or the products or by-products thereof, and such offeror is offering or entering into the commodity option transaction solely for purposes related to its business as such; (2) The offeree must be a producer, processor, or commercial user of, or a merchant handling the commodity that is the subject of the commodity option transaction, or the products or by-products thereof, and such offeree is offered or entering into the commodity option transaction solely for purposes related to its business as such; and (3) The commodity option must be intended to be physically settled, so that, if exercised, the option would result in the sale of an exempt or agricultural commodity for immediate or deferred shipment or delivery. (b) In connection with any commodity option transaction entered into pursuant to paragraph (a) of this section, every counterparty that is not a swap dealer or major swap participant shall: (1) Comply with the swap data recordkeeping requirements of Sec. 45.2 of this chapter, as otherwise applicable to any swap transaction; (2) Obtain a legal entity identifier pursuant to Sec. 45.6 of this chapter if the counterparty to the transaction involved is a swap dealer or major swap participant, and provide such legal entity identifier to the swap dealer or major swap participant counterparty; and (3) Notify the Division of Market Oversight through an email to [email protected]: (i) No later than 30 days after entering into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year, or (ii) Provide notice that the Non-SD/MSP reasonably expects to enter into trade options, whether reported or unreported, having an aggregate notional value in excess of $1 billion during any calendar year. (c) In connection with any commodity option transaction entered into pursuant to paragraph (a) of this section, the following provisions shall apply to every trade option counterparty to the same extent that such provisions would apply to such person in connection with any other swap: (1) Part 20 of this chapter (Swaps Large Trader Reporting); (2) Subpart J of part 23 of this chapter (Duties of Swap Dealers and Major Swap Participants); (3) Sections 23.200, 23.201, 23.203, and 23.204 of this chapter (Reporting and Recordkeeping Requirements for Swap Dealers and Major Swap Participants); and (4) Section 4s(e) of the Act (Capital and Margin Requirements for Swap Dealers and Major Swap Participants). (d) In addition, any person or group of persons offering to enter into, entering into, confirming the execution of, maintaining a position in, or otherwise conducting activity related to a commodity option transaction in interstate commerce pursuant to paragraph (a) of this section shall remain subject to part 180 of this chapter (Prohibition Against Manipulation) and Sec. 23.410 of this chapter (Prohibition on Fraud, Manipulation, and other Abusive Practices) and the antifraud, anti-manipulation, and enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act. (e) The Commission may, by order, upon written request or upon its own motion, exempt any person, either unconditionally or on a temporary or other conditional basis, from any provisions of this part, and the provisions of the Act, including any Commission rule, regulation, or order thereunder, otherwise applicable to any other swap, other than Sec. 32.4 of this chapter, part 180 of this chapter (Prohibition Against Manipulation), and Sec. 23.410 of this chapter (Prohibition on Fraud, Manipulation, and other Abusive Practices), and the antifraud, anti-manipulation, and enforcement provisions of sections 2, 4b, 4c, 4o, 4s(h)(1)(A), 4s(h)(4)(A), 6, 6c, 6d, 9, and 13 of the Act, if it finds, in its discretion, that it would not be contrary to the public interest to grant such exemption. Issued in Washington, DC, on May 4, 2015, by the Commission. Christopher J. Kirkpatrick, Secretary of the Commission. Note: The following appendices will not appear in the Code of Federal Regulations. [[Page 26209]] Appendices to Trade Options--Commission Voting Summary, Chairman's Statement, and Commissioners' Statements Appendix 1--Commission Voting Summary On this matter, Chairman Massad and Commissioners Wetjen, Bowen, and Giancarlo voted in the affirmative. No Commissioner voted in the negative. Appendix 2--Statement of Chairman Timothy G. Massad I am pleased to support the staff's recommendation to issue a proposed rulemaking to revise the rules regarding trade options, which are a subset of commodity options. Specifically, the Commission is proposing to reduce reporting and recordkeeping requirements for end-users that transact in trade options in connection with their businesses, including by eliminating the requirement to file form TO. These products are commonly used by commercial participants, so this action should help those participants continue to do so cost-effectively. We will continue to look at ways that we can make sure commercial end-users can use these markets effectively and to make sure that the new regulatory framework for swaps does not impose unintended consequences or burdens for them. An important part of this effort has been, and shall continue to be, fine-tuning our rules so that commercial companies can continue to conduct their daily operations efficiently. This proposed rulemaking would relax reporting and recordkeeping requirements where two commercial parties enter into trade options with each other in connection with their respective businesses. These proposed amendments are generally intended to reduce burdens for end-users, many of whom, as commenters explained, face logistical impediments and significant costs in connection with reporting their trade options. This proposed rulemaking reduces and clarifies requirements for end-users that use trade options in connection with their businesses, and the proposed amendments would allow the Commission to maintain regulatory insight into the market for otherwise unreported trade options. End-users would remain subject to the recordkeeping requirements in Sec. 45.2, which require market participants to maintain full and complete records and to open their records to inspection upon the Commission's request. Additionally, the proposed $1 billion notice requirement would provide the Commission insight into the size of the market for unreported trade options and the identities of the most significant market participants. I look forward to receiving public comment on this proposed rulemaking. Appendix 3--Concurring Statement of Commissioner Sharon Y. Bowen Today, we are approving a proposed rule that would implement changes to the Commission's Trade Option exemption to reduce the burden on commercial entities seeking to hedge risks associated with their physical businesses. I support these changes. However, based upon comments the Commission has received and meetings that I have had with members of the public, I believe the Commission should consider additional clarifications to better ensure legal certainty for the manufacturing, energy and agricultural industries' ability to address their commercial risks. In the manufacturing, agriculture and energy sectors, a wide variety of physically-delivered instruments are used to secure companies' commercial needs for a physical commodity. These instruments, although they call for physical delivery, often contain some element of optionality that can lead to questions about their appropriate regulatory treatment. These contracts, particularly in the energy sector, are all commonly referred to as physical contracts, and they, according to what I have been told, often receive similar treatment from both a business operations and an accounting standpoint within the entities that use them. Further, these physical contracts are often handled and accounted for separately from other derivatives, such as futures contracts or cash-settled swaps, according to market participants. Treating some portion of these physical contracts as swaps simply because they may contain some characteristics of commodity options can lead to significant costs and difficulties. For instance, companies may have to reconfigure their business systems to parse transactions where there was, before Dodd Frank, no need to undertake such a reconfiguration. Many commenters and people I have met have expressed particular concerns regarding how instruments having elements of both forward contracts and some volumetric optionality should be regulated. In a separate release, the Commission plans to finalize guidance on how forward contracts with embedded volumetric optionality relate to the forward contract exclusion from the swap definition. While that release will help address the circumstances under which volumetric optionality embedded in a forward contract do not cause the forward contract to be a ``swap'', my understanding is that additional relief may still be helpful to commercial market participants seeking to hedge their physical needs with instruments that contain a forward contract with volumetric optionality. Market participants have also expressed concerns about the appropriate treatment of ``peaking supply contracts'' which are often used by companies to manage the risks attendant to their need for physical commodities that may be used to generate electricity, run an operating plant, or manufacture or supply other goods and services. For both types of instruments, I think, the Commission could benefit from getting comments on potential avenues for addressing concerns that have been raised about their appropriate treatment. Instruments Containing a Forward Contract With Volumetric Variability As noted in the proposal, the trade option exemption is intended to permit parties to hedge or otherwise enter into commodity option transactions for commercial purposes without being subject to the general Dodd-Frank swaps regime. The exemption continues the long Commission policy of exempting them from requirements of the Commodity Exchange Act that would otherwise apply to commodity options. It provides an exemption for contracts meeting the requirements of the trade option exemption from regulation as swaps to the extent they would otherwise be subject to regulation by virtue of being a ``commodity option''. Both forward contracts and trade options play an important role in managing the physical commodity risks attendant to commercial operations. According to industry participants, there can be difficulty in separating out, for regulatory purposes, the ``option'' component of an instrument containing both a forward contract and an element that might be considered a commodity option. My understanding is that these overall instruments are typically used to address a commercial entity's physical requirements for a particular commodity as part of its ongoing commercial operation and that the commodity option component is often used to manage uncertainty in the commercial supply and demand factors that affect a commercial entities' need for a particular physical commodity. Additionally, these instruments are often highly customized and the various components not always easy to separate and classify, according to industry participants. Given these concerns, I think it would be helpful to get comment upon whether the Commission should consider a new Sec. 32.3(f) as part of the trade option exemption being proposed today. Such an exemption would exempt qualifying trade options from the swap reporting and recordkeeping requirements that would otherwise apply to them as trade options so long as they: (1) Are not severable nor separately marketable from the forward contract component of overall instrument, (2) are related to and entered into concurrently with the forward contract component of overall instrument, and (3) for which the physical commodity underlying the trade option component is the same as that underlying the forward contract component of the overall instrument. The text of such additional exemption would read as follows: ``Sec. 32.3(f) Instruments Containing a Forward Contract with Volumetric Variability. In the case of an instrument containing a forward contract with volumetric variability that meets the definition of a trade option (as defined by paragraph (a)), the component of such instrument that is a trade option shall be subject to only the requirements of paragraph (d) provided: (1) The volumetric variability is not severable nor separately marketable from the forward contract component, (2) the volumetric variability is related to and entered into concurrently with the forward contract component, and (3) the physical commodity underlying the volumetric variability is the same as that underlying the forward contract component.'' [[Page 26210]] Supply Contracts for a Specified Portion of an Entity's Physical Need for a Commodity (e.g., peaking supply contracts) As noted above, concerns have also been raised about the appropriate treatment of peaking supply contracts which are often used by companies to manage the risks attendant to their need for physical commodities that may be used to generate electricity, run an operating plant, or manufacture or supply other goods and services. Market participants have raised concerns about whether or not these contracts could be considered commodity options. In instances where these contracts represent a reservation of a portion of supplier's capacity to provide a particular commodity and not a transaction for the commodity itself, it seems possible these contracts may not be commodity options. One test that has been proposed to determine whether or not such contracts are commodity options is whether: 1. The subject of the agreement, contract or transaction is a binding, sole-source, obligation of a supplier of a physical commodity to stand ready to meet a specified portion of a commercial consumer's physical need for a commodity through providing for the physical delivery of that commodity to the specified commercial consumer or its designee in connection with the physical obligation, 2. The payment provided by the commercial consumer to the commercial supplier for such agreement, contract or transaction is in the nature of a reservation charge to provide the service of standing ready to meet the physical needs of the commercial consumer, 3. Payment for any commodity delivered under such agreement, contract or transaction is at the market price for that commodity at the time of delivery (i.e., the agreement, contract, or transaction is not used to hedge price risk), and 4. The agreement, contract or transaction is necessary to meet the commercial consumer's projected physical needs or is required by regulation. I think the Commission would benefit from receiving comments on this proposed test and peaking supply contracts more generally as it appears to be one of the significant outstanding issues regarding instruments that may or may not be trade options. Together, these two additional items may help address outstanding concerns that have been expressed by commercial market participants, and I think the Commission would benefit by getting comment upon them. Appendix 4--Statement of Commissioner J. Christopher Giancarlo I support the Commission's proposed amendments to the interim final trade options rule. These are common sense reforms that will alleviate certain recordkeeping and reporting burdens that Sec. 32.3 currently imposes on end-users that use trade options to manage commercial risk. The deletion of the reference in Sec. 32.3(c)(2) to part 151 position limits is also appropriate in light of the fact that part 151 was vacated by the court in Int'l Swaps & Derivatives Ass'n v. U.S. Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012). I strongly disagree, however, with the Commission's statement that it preliminarily believes that any future application of position limits would be best addressed in the context of the pending position limits rulemaking. Simply put, position limits for trade options are not ``necessary to diminish, eliminate, or prevent'' excessive speculation. Section 4a(a)(1) of the Commodity Exchange Act (CEA). The final trade options rule should make clear that trade options are exempt from position limits. As the Commission recognized in promulgating the interim final rule establishing the trade options exemption, ``position limits apply only to speculative positions. . . . Trade options, which are commonly used as hedging instruments or in connection with some commercial function, would normally qualify as hedges, exempt from the speculative position limit rules.'' Commodity Options, 77 FR 25320, 25328 n.50 (Apr. 27, 2012). By definition, the offeree to a trade option ``must be a producer, commercial user of, or a merchant handling the commodity that is the subject of the commodity option transaction, or the products or by-products thereof,'' and must restrict the use of trade options ``solely for purposes related to its business as such.'' Sec. 32.3(a)(2). Moreover, the ``option must be intended to be physically settled, so that, if exercised, [it] would result in the sale of an exempt or agricultural commodity for immediate or deferred shipment or delivery.'' Sec. 32.3(a)(3). Given these parameters, the risk that trade options could be used to engage in speculation, much less excessive speculation, is so remote as to be virtually non-existent. Applying a position limits regime to trade options and requiring commercial end-users to seek bona fide hedge treatment for those transactions, which was floated as a possibility in the pending proposed position limits rule, would not be an acceptable outcome. See Position Limits for Derivatives, 78 FR 75680, 75711 (Dec. 12, 2013). As commenters to the proposed position limits rule have pointed out, there is no regulatory benefit to imposing position limits on instruments that inherently are not speculative in nature, and doing so ``will distort commodity markets and impede economically efficient behavior'' by discouraging the use of trade options. Natural Gas Supply Association Comment Letter dated Aug. 4, 2014 at 13. A comment letter filed by the Edison Electric Institute and the Electric Power Supply Association (Joint Associations) cites persuasive examples of how application of the proposed position limits rule would eliminate the ability of market participants to enter into multi-month and multi-year trade options. See Joint Associations Comment Letter dated Feb. 7, 2014 at 6-7; see also American Gas Association Comment Letter dated Feb. 10, 2014 at 5 (the lack of a contractual upper limit in the way that natural gas options are structured make position limit reporting impossible). The Commission has the authority in section 4a(a)(7) of the CEA to exempt ``any person or class of persons, any swap or class of swaps, any contract of sale of a commodity for future delivery or class of such contracts, any option or class of options, or any transaction or class of transactions from any requirement it may establish . . . with respect to position limits.'' As long as the specter of position limits hangs over trade options, market participants that have used these instruments for decades as a cost effective means of ensuring a reliable supply of a physical commodity and to hedge commercial risk will be reluctant to use them. As I have said before, commercial end-users, including commercial end-users of everyday trade options, were not the cause of the financial crisis and the federal government should stop treating them like they were. I urge my fellow Commissioners to eliminate this regulatory uncertainty sooner, rather than later, by exercising our section 4a(a)(7) authority in connection with this trade options rulemaking. I encourage further public comment on the issue. [FR Doc. 2015-11020 Filed 5-6-15; 8:45 am] BILLING CODE 6351-01-P
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section, the meetings will be held at licenses from the following states or or major swap participants; and certain
U.S. Department of Energy, Forrestal territory will not be accepted for non-substantive amendments.
Building, 1000 Independence Avenue building entry and one of the alternate DATES: Comments must be received on
SW., Washington, DC 20585. forms of ID listed below will be or before June 8, 2015.
Individuals will also have the required. ADDRESSES: You may submit comments,
opportunity to participate by webinar. DHS has determined that regular identified by RIN 3038–AE26, by any
To register for the webinar and receive driver’s licenses (and ID cards) from the one of the following methods:
call-in information, please register at following jurisdictions are not • CFTC Web site: http://
http://www1.eere.energy.gov/buildings/ acceptable for entry into DOE facilities: comments.cftc.gov. Follow the
appliance_standards/ Alaska, Louisiana, New York, American instructions for submitting comments
rulemaking.aspx?ruleid=59 . Samoa, Maine, Oklahoma, Arizona, through the Comments Online process
FOR FURTHER INFORMATION CONTACT: John Massachusetts, Washington, and on the Web site.
Cymbalsky, ASRAC Designated Federal Minnesota. • Mail: Send to Christopher
Officer, U.S. Department of Energy Acceptable alternate forms of Photo- Kirkpatrick, Secretary of the
(DOE), Office of Energy Efficiency and ID include: U.S. Passport or Passport Commission, Commodity Futures
Renewable Energy, 950 L’Enfant Plaza Card; An Enhanced Driver’s License or Trading Commission, Three Lafayette
SW., Washington, DC, 20024. Email: Enhanced ID-Card issued by the states Centre, 1155 21st Street NW.,
asrac@ee.doe.gov. of Minnesota, New York or Washington Washington, DC 20581.
SUPPLEMENTARY INFORMATION: (Enhanced licenses issued by these • Hand Delivery/Courier: Same as
The meetings will be held: states are clearly marked Enhanced or Mail, above.
Enhanced Driver’s License); A military • Federal eRulemaking Portal: http://
• May 11, 2015; www.regulations.gov. Follow the
• May 12, 2015 (Air-Conditioning, ID or other Federal government issued
Photo-ID card. instructions for submitting comments.
Heating, and Refrigeration Institute, Please submit your comments using
2111 Wilson Blvd., Suite 500, Docket: The docket is available for
review at www.regulations.gov, only one of these methods.
Arlington, VA 22201); All comments must be submitted in
• May 20, 2015; including Federal Register notices,
public meeting attendee lists and English, or if not, accompanied by an
• May 21, 2015 (950 L‘Enfant Plaza English translation. Comments will be
SW., Washington, DC, Room 7140); transcripts, comments, and other
posted as received to www.cftc.gov. You
• June 1–2, 2015; supporting documents/materials. All
should submit only information that
• June 9–10, 2015; and documents in the docket are listed in
you wish to make available publicly. If
• June 15, 2015 (Webinar only) the www.regulations.gov index.
you wish the Commission to consider
Members of the public are welcome to However, not all documents listed in
information that you believe is exempt
observe the business of the meeting and, the index may be publicly available,
from disclosure under the Freedom of
if time allows, may make oral such as information that is exempt from
Information Act, a petition for
statements during the specified period public disclosure.
confidential treatment of the exempt
for public comment. To attend the Issued in Washington, DC, on May 1, 2015. information may be submitted according
meeting and/or to make oral statements Kathleen B. Hogan, to the procedures established in § 145.9
regarding any of the items on the Deputy Assistant Secretary for Energy of the CFTC’s regulations, 17 CFR 145.9.
agenda, email asrac@ee.doe.gov. In the Efficiency, Energy Efficiency and Renewable The Commission reserves the right,
email, please indicate your name, Energy. but shall have no obligation, to review,
organization (if appropriate), [FR Doc. 2015–11012 Filed 5–6–15; 8:45 am] pre-screen, filter, redact, refuse or
citizenship, and contact information. BILLING CODE 6450–01–P remove any or all of a submission from
Please note that foreign nationals www.cftc.gov that it may deem to be
participating in the public meeting are inappropriate for publication, such as
subject to advance security screening COMMODITY FUTURES TRADING obscene language. All submissions that
procedures which require advance COMMISSION have been redacted or removed that
notice prior to attendance at the public contain comments on the merits of the
meeting. If a foreign national wishes to 17 CFR Part 32 rulemaking will be retained in the
participate in the public meeting, please public comment file and will be
inform DOE as soon as possible by RIN 3038–AE26 considered as required under the
contacting Ms. Regina Washington at Trade Options Administrative Procedure Act and other
(202) 586–1214 or by email: applicable laws, and may be accessible
Regina.Washington@ee.doe.gov so that AGENCY: Commodity Futures Trading under the Freedom of Information Act.
the necessary procedures can be Commission. FOR FURTHER INFORMATION CONTACT:
completed. Anyone attending the ACTION: Notice of proposed rulemaking. David N. Pepper, Special Counsel,
meeting will be required to present a Division of Market Oversight, at (202)
government photo identification, such SUMMARY: The Commodity Futures 418–5565 or dpepper@cftc.gov; or Elise
as a passport, driver’s license, or Trading Commission (the Pallais, Counsel, Office of the General
government identification. Due to the ‘‘Commission’’ or the ‘‘CFTC’’) is Counsel, at (202) 418–5577 or epallais@
required security screening upon entry, proposing to amend the trade option
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cftc.gov; Commodity Futures Trading
individuals attending should arrive exemption in its regulations, as Commission, Three Lafayette Centre,
early to allow for the extra time needed. described herein, in the following 1155 21st Street NW., Washington, DC
Due to the REAL ID Act implemented subject areas: Reporting requirements 20581.
by the Department of Homeland for trade option counterparties that are SUPPLEMENTARY INFORMATION:
Security (DHS) recent changes regarding not swap dealers or major swap
ID requirements for individuals wishing participants; recordkeeping I. Introduction
to enter Federal buildings from specific requirements for trade option In April 2012, pursuant to section
states and U.S. territories. Driver’s counterparties that are not swap dealers 4c(b) of the Commodity Exchange Act
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![Federal Register / Vol. 80, No. 88 / Thursday, May 7, 2015 / Proposed Rules 26201
(the ‘‘CEA’’ or the ‘‘Act’’),1 the meet the following requirements: (1) requirements for SDs and MSPs under
Commission issued a final rule to repeal The offeror is either an eligible contract CEA section 4s(e); 15 and any applicable
and replace part 32 of its regulations participant (‘‘ECP’’) 7 or a producer, antifraud and anti-manipulation
concerning commodity options.2 The processor, commercial user of, or provisions.16
Commission undertook this effort to merchant handling the commodity that In adopting § 32.3, the Commission
address section 721 of the Dodd-Frank is the subject of the commodity option stated that the trade option exemption is
Act Wall Street Reform and Consumer transaction, or the products or generally intended to permit parties to
Protection Act (the ‘‘Dodd-Frank Act’’ or byproducts thereof (a ‘‘commercial hedge or otherwise enter into
‘‘Dodd-Frank’’),3 which, among other party’’) that offers or enters into the commodity option transactions for
things, amended the CEA to define the commodity option transaction solely for commercial purposes without being
term ‘‘swap’’ to include commodity purposes related to its business as such; subject to the full Dodd-Frank swaps
options.4 Notably, § 32.2(a) provides the (2) the offeree is, and the offeror regime.17 This limited exemption
general rule that commodity option reasonably believes the offeree to be, a continued the Commission’s
transactions must be conducted in commercial party that is offered or longstanding practice of providing
compliance with any Commission rule, enters into the transaction solely for commercial participants in trade
regulation, or order otherwise purposes related to its business as such; options with relief from certain
applicable to any other swap.5 and (3) the option is intended to be requirements that would otherwise
In response to requests from physically settled so that, if exercised, apply to commodity options.18
commenters, the Commission added a the option would result in the sale of an The Commission further explained
limited exception to this general rule for exempt or agricultural commodity 8 for that the applicable conditions in
physically delivered commodity options immediate or deferred shipment or § 32.3(b)–(d) were primarily intended to
purchased by commercial users of the delivery.9 preserve a level of visibility into the
commodities underlying the options Commodity option transactions that market for trade options while still
(the ‘‘trade option exemption’’).6 meet these requirements are generally reducing the regulatory compliance
Adopted as an interim final rule, § 32.3 exempt from the provisions of the Act burden for trade option participants.19
provides that qualifying commodity and any Commission rule, regulation, or The Commission invited market
options are generally exempt from the order promulgated or issued thereunder, participants to comment on the trade
swap requirements of the CEA and the otherwise applicable to any other swap, option exemption, and provided a list of
Commission’s regulations, subject to subject to the conditions enumerated in specific questions for commenters’
certain specified conditions. To qualify § 32.3(b)–(d).10 These conditions consideration.20
for the trade option exemption, a include: Recordkeeping and reporting In the year following the
commodity option transaction must requirements; 11 large trader reporting Commission’s adoption of the trade
requirements in part 20; 12 position option exemption, the Commission’s
1 7 U.S.C. 6c(b) (providing that ‘‘[n]o person shall limits under part 151; 13 certain Division of Market Oversight (‘‘DMO’’)
offer to enter into, enter into or confirm the recordkeeping, reporting, and risk issued a series of no-action letters
execution of, any transaction involving any granting relief from certain conditions
commodity regulated under this chapter which is
management duties applicable to swap
of the character of, or is commonly known to the dealers (‘‘SDs’’) and major swap
trade as an ‘option’ . . . contrary to any rule, participants (‘‘MSPs’’) in subparts F and their swaps activities (including all their trade
regulation, or order of the Commission prohibiting option activities). See 17 CFR 23.201(c), 23.204(a).
J of part 23; 14 capital and margin 15 See 17 CFR 32.3(c)(5).
any such transaction or allowing any such
transaction under such terms and conditions as the 16 See 17 CFR 32.3(d). Note that § 32.2 also
7 See 7 U.S.C. 1a(18) (defining ‘‘eligible contract
Commission shall prescribe’’). preserves the continued application of § 32.4,
2 See Commodity Options, 77 FR 25320 (Apr. 27, participant’’); 17 CFR 1.3(m) (further defining which specifically prohibits fraud in connection
2012) (‘‘Commodity Options Release’’). The ‘‘eligible contract participant’’). with commodity option transactions, to commodity
8 See 7 U.S.C. 1a(20) (defining ‘‘exempt
Commission also issued certain conforming options subject to the trade option exemption. See
amendments to parts 3 and 33 of its regulations. See commodity’’ to mean a commodity that is not an 17 CFR 32.2, 32.4.
id. The Commission’s regulations are set forth in agricultural commodity or an ‘‘excluded 17 See 77 FR at 25326, n.39. For example, trade
Chapter I of Title 17 of the Code of Federal commodity,’’ as defined in 7 U.S.C. 1a(19)); 17 CFR options do not factor into the determination of
Regulations. 1.3(zz)(defining ‘‘agricultural commodity’’). whether a market participant is an SD or MSP; trade
3 Public Law 111–203, 124 Stat. 1376 (2010). Examples of exempt commodities include energy options are exempt from the rules on mandatory
4 See 7 U.S.C. 1a(47)(A)(i) (defining ‘‘swap’’ to commodities and metals. clearing; and trade options are exempt from the
9 See 17 CFR 32.3(a).
include ‘‘[an] option of any kind that is for the rules related to real-time reporting of swaps
10 See 17 CFR 32.3(a), (b)–(d).
purchase or sale, or based on the value, of 1 or more transactions. The provisions identified in this list
. . . commodities . . .’’); 7 U.S.C. 1a(47)(B)(i) 11 See 17 CFR 32.3(b). are not intended to constitute an exclusive or
(excluding options on futures from the definition of 12 See 17 CFR 32.3(c)(1). Applying § 32.3(c)(1), exhaustive list of the swaps requirements from
‘‘swap’’); 7 U.S.C. 1a(36) (defining an ‘‘option’’ as reporting entities as defined in part 20—swap which trade options are exempt.
‘‘an agreement, contract, or transaction that is of the 18 See Regulation and Fraud in Connection with
dealers and clearing members—must consider their
character of, or is commonly known to the trade as, counterparty’s trade option positions just as they Commodity and Commodity Option Transactions,
an ‘option’ . . .’’). The Commission defines would consider any other swap position for the 41 FR 51808 (Nov. 24, 1976) (adopting an
‘‘commodity option’’ or ‘‘commodity option purpose of determining whether a particular exemption from the general requirement that
transaction’’ as ‘‘any transaction or agreement in counterparty has a consolidated account with a commodity options be traded on-exchange for
interstate commerce which is or is held out to be reportable position. See 17 CFR 20.1. A trade option commodity option transaction for certain
of the character of, or is commonly known to the counterparty would not be responsible for filing transactions involving commercial parties);
trade as, an ‘option,’ ‘privilege,’ ‘indemnity,’ ‘bid,’ large trader reports unless it qualifies as a Suspension of the Offer and Sale of Commodity
‘offer,’ ‘call,’ ‘put,’ ‘advance guaranty’ or ‘decline ‘‘reporting entity,’’ as that term is defined in § 20.1. Options, 43 FR 16153, 16155 (Apr. 17, 1978)
guaranty’ and which is subject to regulation under 13 See 17 CFR 32.3(c)(2). See also Int’l Swaps & (adopting a rule suspending all trading in
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the Act and these regulations.’’ See 17 CFR 1.3(hh). Derivatives Ass’n v. U.S. Commodity Futures commodity options other than such exempt trade
5 See 17 CFR 32.2. Trading Comm’n, 887 F. Supp. 2d 259, 270 (D.D.C. options); Trade Options on the Enumerated
6 See 77 FR at 25326–29. See also 17 CFR 32.2(b); 2012), vacating the part 151 rulemaking, Position Agricultural Commodities, 63 FR 18821 (Apr. 16,
32.3. The interim final rule continued the Limits for Futures and Swaps, 76 FR 71626 (Nov. 1998) (authorizing the off-exchange trading of trade
Commission’s long history of providing special 18, 2011). options in agricultural commodities).
19 See 77 FR at 25326–27.
treatment to ‘‘trade options’’ dating back to the 14 See 17 CFR 32.3(c)(3)–(4). Note that § 32.3(c)(4)
Commission’s original trade option exemption in explicitly incorporates §§ 23.201 and 23.204, which 20 See 77 FR 25329–30. Comments were due on
1976. See Regulation and Fraud in Connection with require counterparties that are SD/MSPs to comply or before June 26, 2012. The comment file is
Commodity and Commodity Option Transactions, with part 45 recordkeeping and reporting available at http://comments.cftc.gov/
41 FR 5108 (Nov. 18, 1976). requirements, respectively, in connection with all PublicComments/CommentList.aspx?id=1196.
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then the foregoing calculation should be option counterparty is an SD/MSP, it MSPs must only comply with the
based on a current market price of the would be subject to the recordkeeping applicable recordkeeping provisions in
reference commodity at the time the provisions of § 45.2(a). If a counterparty § 45.2,52 with the following
option is entered into. For example, if is a Non-SD/MSP, it would be subject to qualification: The Non-SD/MSP trade
the trade option involves crude oil that the less stringent recordkeeping option counterparty must obtain an LEI
is deliverable on, or similar to, crude oil requirements of § 45.2(b).45 In adopting pursuant to § 45.6 and provide such LEI
that is deliverable on the New York § 32.3(b), the Commission stated that the to its counterparty if that counterparty
Mercantile Exchange (‘‘NYMEX’’), then recordkeeping condition was intended is an SD/MSP.53
the price of the nearby NYMEX crude to ensure that trade option participants These amendments are intended to
oil futures contract may be used as the are able to provide pertinent reduce recordkeeping burdens for Non-
market price of the commodity at the information regarding their trade SD/MSP trade option counterparties,
time the trade option is entered into.40 options activity to the Commission, if while allowing a trade option
In light of the other proposed requested.46 counterparty that is an SD/MSP to
amendments that would generally Additional recordkeeping comply with applicable part 45
remove reporting requirements for Non- requirements in part 45, separate and reporting obligations by properly
SD/MSP counterparties to trade options, apart from those specified in § 45.2 and identifying its Non-SD/MSP trade
the proposed Notice Requirement would which would apply to all trade option option counterparty by that
provide the Commission insight into the counterparties by operation of § 32.3(b) counterparty’s LEI in all recordkeeping
size of the market for unreported trade include: 47 as well as all swap data reporting, just
options and the identities of the most • each swap must be identified in all as the SD/MSP would for any other
significant market participants. recordkeeping by the use of a unique swap.54
Additionally, the proposed Notice swap identifier (‘‘USI’’); 48 C. Non-substantive amendment to
Requirement would help guide the • each counterparty to any swap must Commission regulation § 32.3(c)
Commission’s efforts to collect be identified in all recordkeeping by
additional information through its means of a single LEI; 49 and Commission regulation § 32.3(c)(2)
authority to obtain copies of books or • each swap must be identified in all subjects trade options to part 151
records required to be kept pursuant to recordkeeping by means of a unique position limits, to the same extent that
the CEA and the Commission’s product identifier (‘‘UPI’’) and product part 151 would apply in connection
regulations should market classification system.50 with any other swap.55 However, as
circumstances dictate.41 stated above, part 151 has been
1. Proposed Action: Modify the vacated.56 Furthermore, trade options
B. Recordkeeping requirements for Non- Recordkeeping Requirements for Non- are not subject to position limits under
SD/MSPs SD/MSPs the Commission’s current part 150
Commission regulation § 32.3(b) The Commission proposes to amend position limit regime.57
provides that in connection with any § 32.3(b) to clarify that trade option Therefore, since position limits do not
commodity option transaction that is counterparties that are Non-SD/MSPs currently apply to trade options, the
eligible for the trade option exemption, need not identify their trade options in Commission proposes to amend
every counterparty shall comply with all recordkeeping by means of either a § 32.3(c) by deleting § 32.3(c)(2),
the swap data recordkeeping USI or UPI, as required by §§ 45.5 and including the reference to vacated part
requirements of part 45, as otherwise 45.7.51 Rather, with respect to part 45 151. This would not be a substantive
applicable to any swap transaction.42 In recordkeeping requirements, trade change. Although commenters have
option counterparties that are Non-SD/ requested assurance that position limits
discussing the trade option exemption
will not apply to trade options in the
conditions, however, the Commission
future,58 the Commission preliminarily
noted in the preamble to the Commodity 45 In the case of Non-SD/MSPs, the primary
recordkeeping requirements are set out in § 45.2(b), believes that any future application of
Options Release that ‘‘[t]hese conditions
which essentially requires keeping basic business
include a recordkeeping requirement for records—i.e., ‘‘full, complete and systematic 52 Trade option counterparties that are SD/MSPs
any trade option activity, i.e., the records, together with all pertinent data and would continue to comply with the swap data
recordkeeping requirements of 17 CFR memoranda, with respect to each swap in which recordkeeping requirements of part 45, as they
45.2,’’ and did not reference or discuss they are a counterparty.’’ Non-SD/MSPs are also would in connection with any other swap. See 17
subject to the other general recordkeeping CFR 32.3(b)(4).
any other provision of part 45 that requirements of § 45.2, such as the requirement that 53 For the avoidance of doubt, Non-SD/MSPs
contains recordkeeping requirements.43 records must be maintained for 5 years and must would not otherwise be required to comply with
Pursuant to Commission regulation be retrievable within 5 days. See 17 CFR 45.2(b). § 45.6.
46 See 77 FR at 25327.
§ 45.2, records must be maintained by 54 An SD/MSP that otherwise would report the
47 As discussed above, No-Action Letter 13–08
all trade option participants and made trade option at issue pursuant to § 32.3(b)(1) is
provides no-action relief from certain swap required to identify its counterparty to the trade
available to the Commission as specified recordkeeping requirements in part 45 for a Non- option by that counterparty’s LEI in all
therein.44 However, § 45.2 applies SD/MSP that complies with the recordkeeping recordkeeping as well as all swap data reporting.
different recordkeeping requirements, requirements set forth in § 45.2, provided that if the See, e.g., 17 CFR 23.201, 23.204, and 45.6. See
depending on the nature of the counterparty to the trade option at issue is an SD supra note 36 and 17 CFR 45.6.
or an MSP, the Non-SD/MSP obtains an LEI 55 See 17 CFR 32.3(c)(2).
counterparty. For example, if a trade pursuant to § 45.6 and also provides DMO with a 56 See supra note 13 and accompanying text.
$1 Billion Notice. See supra note 24 and 57 Under current § 150.2, position limits apply to
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40 The forgoing guidance with regard to how to accompanying text. agricultural futures in nine listed commodities and
calculate the notional value of trade options is 48 17 CFR 45.5.
options on those futures. Since trade options are not
similar to that provided in No-Action Letter 13–08 49 Each counterparty to any swap subject to the
options on futures, § 150.2 position limits do not
but has been revised to clarify that the focus of the Commission’s jurisdiction must be identified in all currently apply to such transactions. See 17 CFR
$1 Billion Notice is the value of the trade option recordkeeping and all swap data reporting pursuant 150.2.
at time of contract initiation, not at exercise. to part 45 by means of a single LEI as specified in 58 See, e.g., Coalition (Dec. 22, 2014) at 11; AGA
41 See supra note 38 and accompanying text.
§ 45.6. See 17 CFR 45.6. (Apr. 17, 2014) at 4; IECA (Apr. 17. 2014) at 28;
42 See 17 CFR 32.3(b). 50 17 CFR 45.7.
Intercontinental Exchange, Inc. (April 17, 2014) at
43 See 77 FR at 25327. 51 See supra notes 49 and 49 and accompanying 5; CEWG (Feb. 6, 2013) at 3; COPE (June 26, 2012)
44 17 CFR 32.3(b); 45.2(h). text. at 6.
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![Federal Register / Vol. 80, No. 88 / Thursday, May 7, 2015 / Proposed Rules 26207
annually, the Commission does not A potential alternative to relieving include both written and oral
believe that this requirement would Non-SD/MSPs, which may include communications.78 Under the PRA, an
impact many small entities, if any at all. small entities, from certain agency may not conduct or sponsor, and
Given the significant volume of trade recordkeeping and reporting a person is not required to respond to,
options required to trigger the proposed requirements would be to either (1) not a collection of information unless it
Notice Requirement, the Commission amend the current rule, which would displays a currently valid control
expects that it would apply to only a maintain recordkeeping and reporting number from the Office of Management
small number of entities and that such requirements that Non-SD/MSPs have and Budget (‘‘OMB’’). The Commission
entities would likely not be small represented are onerous, or (2) create a seeks to amend the OMB control
entities.74 The Commission’s view is rule with more specific reporting number 3038–0106—Form TO, Annual
supported by DMO’s experience with parameters for specific entities. While Notice Filing for Counterparties to
the $1 Billion Notice provision in No- the proposal would impose the new Unreported Trade Option. Therefore the
Action Letter 13–08: As indicated annual Notice Requirement on certain Commission is submitting this proposal
above, DMO received a $1 Billion Non-SD/MSPs, overall, the Commission to OMB for review in accordance with
Notice from only sixteen of the more believes that the proposed amendments 44 U.S.C. 3507(d) and 5 CFR 1320.11.
than 300 Non-SD/MSPs that filed a would have a positive economic impact With the exception of the proposed
Form TO in 2014, and all such entities on Non-SD/MSPs that are small entities Notice Requirement, the Commission
are generally well-known in their because they would generally relax believes that these proposed rules will
respective industries.75 reporting requirements across all trade not impose any new information
Filing the $1 Billion Notice would option counterparties that are Non-SD/ collection requirements that require
require affected Non-SD/MSPs to track MSPs. Although the proposal could approval of OMB under the PRA. As a
and aggregate the notional values of expressly limit application of the Notice general matter, the proposed rules
their trade options. The Commission Requirement to entities that do not meet would relax reporting and
expects that this general information the RFA definition of a small entity, the recordkeeping requirements for Non-
should be readily compiled and Commission does not believe that is SD/MSPs entering into trade options
aggregated using a spreadsheet or other necessary because, as stated above, the with each other in connection with their
existing software and would not require Commission does not expect many respective businesses, including the
any professional skills beyond those small entities to be affected by that withdrawal and removal of Form TO. As
typically held by any commercial party. requirement, if any at all. Furthermore, such, the proposed rules will not result
Furthermore, Non-SD/MSPs that even if a small entity were to enter into in the creation of any new information
reasonably expect to enter into trade trade options with an aggregate notional collection subject to OMB review or
options with an aggregate notional value value in excess of $1 billion during a approval under the PRA, except for the
in excess of $1 billion during the calendar year, the Commission believes annual Notice Requirement. Therefore,
calendar year may, in line with the that such information would these proposed rules do not, by
Alternative Notice, simply send an nevertheless be important to the themselves, impose any new
email to DMO to that effect, thereby Commission’s insight into the market information collection requirements
avoiding having to track the notional for otherwise unreported trade options other than those that already exist in
values of their trade options. and may cause the Commission to connection with trade options pursuant
5. An identification, to the extent adjust the threshold for notice reporting to part 32 of the Commission’s
practicable, of all relevant Federal rules above $1 billion. regulations, except for the proposed
which may duplicate, overlap or Notice Requirement.
conflict with the rule. C. Paperwork Reduction Act As noted above, the Commission
The Commission is unaware of any The purposes of the Paperwork proposes to add the Notice Requirement
Federal rules that could duplicate, Reduction Act of 1995, 44 U.S.C. 3501 for trade option counterparties that are
overlap, or conflict with the proposal. et seq. (‘‘PRA’’) are, among other things, Non-SD/MSPs, which requirement is
6. A description of any significant to minimize the paperwork burden to considered to be a collection of
alternatives to the proposed rule which the private sector, ensure that any information within the meaning of the
accomplish the stated objectives of collection of information by a PRA. Accordingly, the Commission is
applicable statutes and which minimize government agency is put to the greatest amending OMB control number 3038–
any significant economic impact of the possible uses, and minimize duplicative 0106 and submitting to OMB an
proposed rule on small entities. These information collections across the information collection request for
may include, for example, (1) the government.76 The PRA applies to all review and approval. If approved, this
establishment of differing compliance or information, ‘‘regardless of form or new collection of information will be
reporting requirements or timetables format,’’ whenever the government is mandatory.
that take into account the resources ‘‘obtaining, causing to be obtained [or] The Commission anticipates that
available to small entities; (2) the soliciting’’ information, and includes affected Non-SD/MSPs may incur
clarification, consolidation, or required ‘‘disclosure to third parties or certain costs in complying with the
simplification of compliance and the public, of facts or opinions,’’ when proposed $1 Billion Notice, including
reporting requirements under the rule the information collection calls for those related to calculating the aggregate
for such small entities; (3) the use of ‘‘answers to identical questions posed notional value of trade options entered
performance rather than design into, and to drafting the notice email
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to, or identical reporting or
standards; and (4) an exemption from recordkeeping requirements imposed and submitting it to DMO. There are no
coverage of the rule, or any part thereof, on, ten or more persons.’’ 77 The PRA additional capital costs associated with
for such small entities. requirements have been determined to this collection because all respondents
include not only mandatory but also are already required to create and store
74 See 15 U.S.C. 632(a) (defining a ‘‘small
voluntary information collections, and detailed records of their trade option
business concern’’ generally to include an
enterprise that is ‘‘not dominant in its field of transactions pursuant to § 32.3(b). The
operation’’). 76 See 44 U.S.C. 3501.
75 See supra note 37 and accompanying text. 77 See 44 U.S.C. 3502. 78 See 5 CFR 1320.3(c)(1).
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![26210 Federal Register / Vol. 80, No. 88 / Thursday, May 7, 2015 / Proposed Rules
Supply Contracts for a Specified Portion of Ass’n v. U.S. Commodity Futures Trading person or class of persons, any swap or class
an Entity’s Physical Need for a Commodity Comm’n, 887 F. Supp. 2d 259 (D.D.C. 2012). of swaps, any contract of sale of a commodity
(e.g., peaking supply contracts) I strongly disagree, however, with the for future delivery or class of such contracts,
As noted above, concerns have also been Commission’s statement that it preliminarily any option or class of options, or any
raised about the appropriate treatment of believes that any future application of transaction or class of transactions from any
peaking supply contracts which are often position limits would be best addressed in requirement it may establish . . . with
used by companies to manage the risks the context of the pending position limits respect to position limits.’’
attendant to their need for physical rulemaking. Simply put, position limits for As long as the specter of position limits
commodities that may be used to generate trade options are not ‘‘necessary to diminish, hangs over trade options, market participants
electricity, run an operating plant, or eliminate, or prevent’’ excessive speculation. that have used these instruments for decades
manufacture or supply other goods and Section 4a(a)(1) of the Commodity Exchange as a cost effective means of ensuring a
services. Act (CEA). The final trade options rule reliable supply of a physical commodity and
Market participants have raised concerns should make clear that trade options are to hedge commercial risk will be reluctant to
about whether or not these contracts could be exempt from position limits. use them. As I have said before, commercial
considered commodity options. In instances As the Commission recognized in end-users, including commercial end-users of
where these contracts represent a reservation promulgating the interim final rule everyday trade options, were not the cause of
of a portion of supplier’s capacity to provide establishing the trade options exemption, the financial crisis and the federal
a particular commodity and not a transaction ‘‘position limits apply only to speculative government should stop treating them like
for the commodity itself, it seems possible positions. . . . Trade options, which are they were.
these contracts may not be commodity commonly used as hedging instruments or in I urge my fellow Commissioners to
options. One test that has been proposed to connection with some commercial function, eliminate this regulatory uncertainty sooner,
determine whether or not such contracts are would normally qualify as hedges, exempt rather than later, by exercising our section
commodity options is whether: from the speculative position limit rules.’’ 4a(a)(7) authority in connection with this
1. The subject of the agreement, contract or Commodity Options, 77 FR 25320, 25328 trade options rulemaking. I encourage further
transaction is a binding, sole-source, n.50 (Apr. 27, 2012). public comment on the issue.
obligation of a supplier of a physical By definition, the offeree to a trade option
[FR Doc. 2015–11020 Filed 5–6–15; 8:45 am]
commodity to stand ready to meet a specified ‘‘must be a producer, commercial user of, or
a merchant handling the commodity that is BILLING CODE 6351–01–P
portion of a commercial consumer’s physical
need for a commodity through providing for the subject of the commodity option
the physical delivery of that commodity to transaction, or the products or by-products
the specified commercial consumer or its thereof,’’ and must restrict the use of trade ENVIRONMENTAL PROTECTION
designee in connection with the physical options ‘‘solely for purposes related to its
AGENCY
obligation, business as such.’’ § 32.3(a)(2). Moreover, the
2. The payment provided by the ‘‘option must be intended to be physically
40 CFR Part 52
commercial consumer to the commercial settled, so that, if exercised, [it] would result
supplier for such agreement, contract or in the sale of an exempt or agricultural [EPA–HQ–OAR–2015–0071; FRL–9926–97–
transaction is in the nature of a reservation commodity for immediate or deferred OAR]
charge to provide the service of standing shipment or delivery.’’ § 32.3(a)(3). Given
ready to meet the physical needs of the these parameters, the risk that trade options RIN 2060–AS57
commercial consumer, could be used to engage in speculation, much
3. Payment for any commodity delivered less excessive speculation, is so remote as to Prevention of Significant Deterioration
under such agreement, contract or be virtually non-existent. Permitting for Greenhouse Gases:
transaction is at the market price for that Applying a position limits regime to trade Providing Option for Rescission of
commodity at the time of delivery (i.e., the options and requiring commercial end-users EPA-Issued Tailoring Rule Step 2
agreement, contract, or transaction is not to seek bona fide hedge treatment for those Prevention of Significant Deterioration
used to hedge price risk), and transactions, which was floated as a
4. The agreement, contract or transaction is possibility in the pending proposed position
Permits
necessary to meet the commercial consumer’s limits rule, would not be an acceptable AGENCY: Environmental Protection
projected physical needs or is required by outcome. See Position Limits for Derivatives, Agency (EPA).
regulation. 78 FR 75680, 75711 (Dec. 12, 2013). As
I think the Commission would benefit from commenters to the proposed position limits ACTION: Proposed rule.
receiving comments on this proposed test rule have pointed out, there is no regulatory
and peaking supply contracts more generally benefit to imposing position limits on SUMMARY: The Environmental Protection
as it appears to be one of the significant instruments that inherently are not Agency (EPA) is proposing to amend the
outstanding issues regarding instruments that speculative in nature, and doing so ‘‘will federal Prevention of Significant
may or may not be trade options. distort commodity markets and impede Deterioration (PSD) program regulations
Together, these two additional items may economically efficient behavior’’ by to allow for rescission of certain PSD
help address outstanding concerns that have discouraging the use of trade options. Natural permits issued by the EPA and
been expressed by commercial market Gas Supply Association Comment Letter
participants, and I think the Commission
delegated reviewing authorities under
dated Aug. 4, 2014 at 13. A comment letter
would benefit by getting comment upon Step 2 of the Prevention of Significant
filed by the Edison Electric Institute and the
them. Electric Power Supply Association (Joint Deterioration and Title V Greenhouse
Associations) cites persuasive examples of Gas (GHG) Tailoring Rule (Tailoring
Appendix 4—Statement of Rule). We are proposing to take this
how application of the proposed position
Commissioner J. Christopher Giancarlo limits rule would eliminate the ability of action in order to provide a mechanism
I support the Commission’s proposed market participants to enter into multi-month for the EPA and delegated reviewing
amendments to the interim final trade and multi-year trade options. See Joint authorities to rescind PSD permits that
mstockstill on DSK4VPTVN1PROD with PROPOSALS
options rule. These are common sense Associations Comment Letter dated Feb. 7, are no longer required in light of the
reforms that will alleviate certain 2014 at 6–7; see also American Gas United States (U.S.) Supreme Court’s
recordkeeping and reporting burdens that Association Comment Letter dated Feb. 10,
decision in Utility Air Regulatory Group
§ 32.3 currently imposes on end-users that 2014 at 5 (the lack of a contractual upper
use trade options to manage commercial risk. limit in the way that natural gas options are (UARG) v. EPA and the amended
The deletion of the reference in § 32.3(c)(2) structured make position limit reporting appeals court judgment in Coalition for
to part 151 position limits is also appropriate impossible). Responsible Regulation (Coalition) v.
in light of the fact that part 151 was vacated The Commission has the authority in EPA, vacating that rule. These decisions
by the court in Int’l Swaps & Derivatives section 4a(a)(7) of the CEA to exempt ‘‘any determined that Step 2 of the Tailoring
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Document Created: 2015-12-16 07:50:20
Document Modified: 2015-12-16 07:50:20
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking. | |
| Dates | Comments must be received on or before June 8, 2015. | |
| Contact | David N. Pepper, Special Counsel, Division of Market Oversight, at (202) 418-5565 or [email protected]; or Elise Pallais, Counsel, Office of the General Counsel, at (202) 418- 5577 or [email protected]; Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. | |
| FR Citation | 80 FR 26200 | |
| RIN Number | 3038-AE26 | |
| CFR Associated | Commodity Futures; Consumer Protection; Fraud and Reporting and Recordkeeping Requirements |
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