The CFTC Division of Market Oversight (DMO) has issued a no-action letter that will allow most swaps end users to report all trade options on an annual aggregate basis. Trade options are commodity options (which include some forward contracts with embedded optionality) that satisfy certain conditions regarding the counterparties’ (1) commercial activities with respect to the underlying commodity and (2) intent to make or take physical delivery. Prior to the no-action letter, trade options were reportable on an annual aggregate basis on CFTC Form TO only if neither of the counterparties had been required to report a non-trade option swap as a swap reporting counterparty within the previous 12 months. Trade options that did not satisfy that condition were required to be reported on a transaction-by-transaction basis. The no-action letter effectively allows all trade options by a non-swap dealer/non-major swap participant (non-SD/MSP) counterparty to be reportable on the annual Form TO as long as the counterparty notifies the DMO within 30 days if it enters into trade options having an aggregate notional value in excess of $1 billion during any calendar year.
The no-action letter also relieves non-SD/MSP counterparties from all recordkeeping requirements with respect to trade options other than the CFTC’s rule 45.2 recordkeeping requirements as long as the counterparty satisfies the same $1 billion notice requirement, provides its legal entity identifier (LEI) to any SD/MSP trade option counterparties, and complies with the other non-recordkeeping requirements (e.g., position limits, fraud prohibitions) with respect to its trade options.