August 15, 2012

CFTC Staff Grants Temporary No-Action Relief to Persons Eligible for the Trade Option Exemption

Washington, DC - Today, the staff of the Division of Market Oversight issued a no-action letter providing that, for a limited time, market participants can rely on the trade option exemption in CFTC regulation 32.3 without complying with specified provisions thereof. The no-action letter is effective until the earlier of December 31, 2012, or the effective date of any final action taken by the Commission in response to comments on the Trade Option Exemption Interim Final Rules (described below).

To rely on the no-action relief, market participants must comply with: (1) the conditions for qualifying as a “trade option” (§ 32.3(a)); (2) speculative position limits (§ 32.3(c)(2)); and (3) prohibitions on fraud, manipulation and other abusive trade practices (§ 32.3(d)).

The CFTC’s April 27, 2012 commodity options rulemaking noted that, as provided in the Dodd-Frank Act, commodity options are “statutorily defined as swaps” and thus are “subject to the same rules applicable to any other swap.” The April 27^th release also included, however, an interim final rule incorporating a trade option exemption. Under that exemption, commodity options meeting certain conditions (for example, the option buyer must be a commercial and the option, if exercised, must result in delivery) would be exempt from most provisions of the Dodd-Frank Act applicable to swaps, the Commodity Exchange Act and the Commission’s regulations. The April 27^th release also noted that the pending Product Definitions Final Rules would address the issue of whether a commodity option or a transaction with optionality is subject to the swap definition in the first instance. In particular, if a commodity option or a transaction with optionality constitutes a forward contract it would be excluded from the scope of the swap definition and, as such, exempt from any regulation by the Commission as either a swap or a trade option.

On August 13, 2012, as part of a joint rulemaking with the Securities and Exchange Commission, the CFTC published the Product Definitions Final Rules. In those final rules, the CFTC requested further comment regarding forwards with embedded volumetric options. In general, the Commission asked whether the Commission’s approach to determining the proper regulatory treatment of forward contracts with embedded volumetric options was appropriate. A footnote to the Product Definitions Final Rule noted that “it is expected that CFTC staff will be issuing no-action relief with respect to [most of] the conditions of the modified trade option exemption … [in order to] afford the CFTC an opportunity to review and evaluate the comments received on both … embedded volumetric optionality, and the modified trade option exemption.”

Last Updated: August 15, 2012