2015-11020

Federal Register, Volume 80 Issue 88 (Thursday, May 7, 2015)

[Federal Register Volume 80, Number 88 (Thursday, May 7, 2015)]

[Proposed Rules]

[Pages 26200-26210]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 2015-11020]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 32

RIN 3038-AE26

Trade Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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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\

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\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.

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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\

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\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).

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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\

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\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.

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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\

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\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).

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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\

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\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.

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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\

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\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.

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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.

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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.'').

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[[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\

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\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).

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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\

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\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.

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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.

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\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).

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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\

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\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).

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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\

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\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.''

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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\

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\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.

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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\

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\41\ See supra note 38 and accompanying text.

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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\

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\42\ See 17 CFR 32.3(b).

\43\ See 77 FR at 25327.

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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\

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\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.

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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\

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\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.

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each swap must be identified in all recordkeeping by the

use of a unique swap identifier (``USI''); \48\

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\48\ 17 CFR 45.5.

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each counterparty to any swap must be identified in all

recordkeeping by means of a single LEI; \49\ and

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\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.

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each swap must be identified in all recordkeeping by means

of a unique product identifier (``UPI'') and product classification

system.\50\

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\50\ 17 CFR 45.7.

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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\

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\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.

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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\

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\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.

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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\

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\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.

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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\

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\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).

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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\

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\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).

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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.

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\62\ See 17 CFR 140.99(a)(2). See also No-Action Letter 13-08 at

5.

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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.

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\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).

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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.

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\66\ 7 U.S.C. 19(a).

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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.

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\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).

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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\

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\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.

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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:

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\72\ See Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25,

2001).

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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.

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\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).

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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\

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\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.

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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.

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\76\ See 44 U.S.C. 3501.

\77\ See 44 U.S.C. 3502.

\78\ See 5 CFR 1320.3(c)(1).

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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

 

Last Updated: May 7, 2015